Businesses must plan ahead for likely Autumn tax changes
The Chancellor's Summer Statement saw the introduction of a number of measures aimed at supercharging the UK ailing economy - and soon all eyes will be on Rishi Sunak's Autumn Budget. Giving careful consideration to certain areas, before taxes start to rise, could bring real benefits to business owners in the long-term.
Zoe Thomas, Tax Partner at professional and financial services firm, Smith & Williamson in Bristol, sets out some key areas to consider.
De-risk to ensure your business weathers the storm
It is not uncommon for trading businesses to invest excess cash, perhaps in property or on the stock market. As well as potentially jeopardising tax reliefs like Business Property Relief (a relief from inheritance tax), this also comes with personal risk. For instance, if the trade gets into financial difficulties, creditors may force a sale of the investments.
One way of managing this would be to de-merge the investments away from the trade. Provided this is done correctly, this can be achieved without crystallising any tax liabilities and can also be carried out with clearance from HMRC.
However, it must be stressed that if this is carried out purely to frustrate creditors, then they can “follow the assets”. It is, therefore, vital to think ahead and anticipate risks before they come to fruition.
Conversely, there may be occasions when it is advisable to merge different aspects of a business where they are operated through separate entities.
You may also decide you want to sell assets and re-deploy funds differently. It is important to consider the tax effects of any sales and to ensure any gains are managed, with all relevant deductions and reliefs being claimed.
There is no “one size fits all” approach and professional advice is key.
A robust succession plan is needed now
The current crisis highlights the need for clear succession plans not only to plan for what could happen if key team members become ill or financially incapacitated, but also because there are some changes pending that could impact the availability of reliefs which business owners can currently access.
At the moment, provided that a business satisfies certain conditions, it can be passed inheritance tax-free to the next generation or whoever. However, an All Party Parliamentary Group (APPG) published a report in January 2020, suggested a number of significant changes to inheritance tax, including the abolition of Business Property Relief.
If this goes ahead, then the likelihood is that the estates of business owners will pay a lower rate of inheritance tax and be able to pay that tax in instalments over a period of time. Nevertheless, this could put a financial strain on some businesses and business owners should consider now how a change of this nature could affect the business and plan accordingly.
What if I want to sell?
In the current climate, this may prove difficult, depending on the nature of your specific market. However, for some business owners, the sale of their business might take on some additional urgency, especially bearing in mind that Rishi Sunak has launched a review of the capital gains tax regime which is likely to lead to increases in tax. Those wishing to sell might be keen and best advised to bank the current rates of capital gains tax.
However, if you want to exit and a third party buyer is not an option, there are a couple of options you might consider.
If you have a management team who might be interested in buying the business, then you could consider a management buyout process. This would allow you to benefit from current rates of capital gains tax whilst also structuring it so that the management team can pay the sale process over a period of time from the profits of the business.
You could also consider an Employee Ownership Trust (EOT). Provided certain conditions are satisfied, a sale to an EOT is free of capital gains tax. This means the seller can enjoy the entire sale proceeds, which are usually paid over time from the profits which the company generates. There are also various commercial advantages to EOTs which can hugely benefit the business.
These are challenging times and it is very easy to assume an "ostrich position" but actually it is important to consider the long-term as well as the here-and-now.
With so much focus on the tax system – and the need for the government to generate revenue – the possibility of no tax changes in the Autumn Budget seems unlikely. Now is a really good time to consider your objectives and plan for the future.
If you would like to discuss your specific circumstances, please contact Zoe Thomas on 0207 131 8871 or email zoe.thomas@smithandwilliamson.com
