Building for the future with bricks and mortar

Property investment can undoubtedly bring rewards, but it’s important to recognise the potential pitfalls too, writes Jonathan Wilson of Barnett & Turner. Although there are all kinds of possibilities when it comes to investing for your future, property understandably seems an attractive option for both individuals and businesses. It’s worth bearing a number of factors in mind though before taking the plunge with bricks and mortar.

First of all, there’s no guarantee of a quick profit. You may well see a good return in the long run, but it’s important to be patient. It’s also not particularly wise to see property as a way of releasing easy cash. Although it’s always possible to remortgage, it’s difficult to predict fluctuations in property prices and the ratio between loans and value. And who can forecast all the political and economic changes that might influence the price over a particular period of time or in a specific region?

Think about your objectives

One of the attractive features of property investment is the possibility of seeing an increase in capital value over time, while also receiving a rental income. You’ll need to be clear, however, over which your priority is.

If rent is your primary focus, are you confident you can attract reliable tenants in the area you’ve chosen to invest? With your mortgage and tax commitments, you’ll need to generate enough regular income to cover your outgoings and make some profit on top.

If you’re aiming for an increase in the value of the property, how well are you able to read the market? Can you be sure that demand is likely to increase in a particular geographical area?

Factors you can’t ignore

It’s sometimes easy to forget the inconvenient, yet essential, costs associated with property purchases. Surveys, solicitors’ fees and stamp duty are just the start. You also have to factor in the time involved in management and maintenance. And don’t forget that mortgage rates will inevitably fluctuate over time.

The best advice is to go into any new property venture with your eyes open. If you’re patient and prepared to invest for the long-term, then the potential for good returns is definitely there. But don’t underestimate the challenges and remember to seek some guidance from your professional advisers along with way!

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Finding the accountant that’s right for you and your business values

How can you tell whether an accountancy firm is matched to the needs of your business? According to Jono Wilson of Barnett & Turner, it’s worth looking at the way in which they’re organised and whether they have a clear sense of the values of their business. Core values are very important in any business, but when you’re working in a professional capacity with a client’s finances, they take on a particular significance. If you’re considering which accountancy practice to partner with, it’s worth asking whether the firm has given serious consideration to the principles that guide their own business.

On a basic level each practice will deliver very similar services, but how they deliver them will define a client’s relationship with their accountant.

Of course, every firm will have its own emphasis and language. But the kinds of things I would personally look out for are trustworthiness, openness and honesty. The very nature of the profession means that these values have to be explicit. And then you will look for assurances about their day-to-day operation and the way in which they will interact with you. I would expect to hear reference to teamwork, excellence and service.

When you drill down further, we come to some very practical issues. How exactly is the level of service maintained? Compartmentalisation in a professional firm can be important when dealing with larger clients, but for an SME, it’s often confusing and counter-productive.

If there’s a danger of being passed from pillar to post and finding that you never seem to get the same person dealing with your affairs, you might legitimately ask the question as to whether this is in your own best interests.

At Barnett & Turner, one key figure (often me as managing partner) takes responsibility for managing each of our client relationships. That key figure can then get to understand our client’s business better and see the bigger picture.

Values are of course at the heart of any good relationship - after that, it’s down to service. If you don’t want to get lost in a confusing relationship, it’s best to ask a few pertinent questions up front!

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Time to invest for the future

If you want your business to operate efficiently in the modern age, you need to embrace change argues Jono Wilson of Barnett & Turner. But how can you plan for the investment needed? Business life changes constantly and new competitive challenges come along all the time.

Take communications, for example. If you’ve been trading for a number of years, you probably have a range of well-established channels with your customers. Often, in the past, we were used to face-to-face meetings, phone calls and so-called ‘snail’ mail. To the millennial generation, however, the world’s a very different place. Chat rooms and social networks tend to be a lot more familiar than postage stamps.

So what if you decide that it’s time to upgrade your infrastructure and move with the times? What exactly are the implications? To be honest, you face many of the same issues whether you’re thinking of upgrading your IT infrastructure, investing in new equipment for a farm or expanding your manufacturing facility.

You’ll obviously need to think about funding, but it’s also essential to have an implementation and training plan in place. There may be a process of change management involved. How exactly do you intend to position your business moving forward? How will this impact on your work and on staff morale? It’s essential to sell any changes internally before communicating them externally.

Your professional advisers can get involved at a variety of levels. There’s number-crunching to be done on the investment figures, of course, but your accountants may also be able to help you with the establishment of KPIs and project management.

Fundamentally, it’s good to get an objective viewpoint on the essential questions. Can we actually afford to do this? What downtime will be involved? And how can we continue to provide the service that clients expect while we make the investment required?

Although change can sometimes seem daunting, the costs of failing to act can often be huge. If a competitor is able to provide a product or service more efficiently and less labour intensively, it stands to reason that you may be left behind. So it’s a question of adapting in order to compete.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Buy to let: still an attractive proposition?

If you’re someone who rents out residential property – or you’re considering it – it’s important to take stock of some important changes in the July Budget, writes Tracy Henson of chartered accountants Barnett & Turner. ‘Buy to let’ tend to be the three little words to make investors go weak at the knees. For a number of years now, becoming a landlord has been seen as a clever ploy. Indeed, people purchasing property with the aim of renting it to tenants have almost certainly been playing a significant part in the recent property boom.

The Chancellor’s announcements in the July Budget, however, mean that the financial calculations will be a little more complex. Higher-rate tax payers may have particular cause for concern, because there are now going to be restrictions on the amount of tax relief applicable to mortgage interest.

The changes will be phased in from 2017/18 and the following four years, allowing time for landlords to adjust. In the first year, 75% of the interest can be relieved at the higher rate, while the remaining 25% is allowed at 20%, which will come off the person’s net liability as a tax reducer. The tax reducer may also be restricted by some limitations. Any excess finance costs may, however, be carried forward in certain circumstances.

In 2018-9, the ratio becomes 50/50. That means that 50% of the interest is relieved at the higher rate and the other 50% at the 20% rate. The year afterwards, the percentages are 25/75 and by the time we reach the tax year 2020-1, there is no higher-rate relief at all.

There’s another issue which you may want to discuss with your accountant too.

From April 2016, the ‘wear and tear’ allowance for landlords will be abolished. This straightforward system previously meant that when a property had been let fully furnished, the landlord could claim 10% of the rent as a deduction in profit – in lieu of white goods and furnishings supplied to the tenant. This could happen each year as a matter of course, regardless of the actual state of the furnishings. Under the new rules, you’re only allowed the cost of actual replacement of goods – a new fridge freezer, for example.

If you’re planning on becoming a landlord on a smaller scale, however, and are just intending to rent out a room in your home, there’s some good news. Whereas previously only £4,250 of the annual rental income was tax free, the figure is rising to a more realistic £7,500. An incentive perhaps from the government to help solve wider issues in the housing market.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Start planning for the future with your accountant

Accountants do a lot more than simply crunch numbers, writes David Wilson of Barnett & Turner. They can be trusted partners who’ll help you draw up a compelling business plan. When I started out in the accountancy profession, business planning was not an essential part of life. The small businesses we dealt with didn’t recognise the importance of looking forward and planning for the development of their company.

Times have changed and, today, business planning is very much an essential part of corporate life. Why the transition? Well, the most common reason to prepare a plan is to explain your business priorities, capabilities and ambitions to an external lender, such as a bank. In an era of reduced access to finance and the application of rigorous lending criteria, a professional approach is absolutely essential.

A business plan is, however, important at other levels too. It is an essential business management tool which provides a structure and guidelines for the running of your business.

From my own point of view as a professional advisor, assisting clients with the preparation of their plans is an ideal way of developing a close relationship with them and their staff.

The preparation of a business plan naturally involves financial information, but it also enables us as accountants to show that we are business advisors with commercial awareness, rather than simply number crunchers. A well-written plan will get behind the numbers. It will include comments on the aims and objectives of the business, as well as the personal ambitions of the owners. We will make reference to the key people in the organisation, the state of the company’s assets and planned capital expenditure.

A good plan will include observations on marketing strategies and risk management – the latter being an essential part of today’s business life. Working with clients to produce a business plan is therefore a highly rewarding and fulfilling exercise. It is also an excellent way to demonstrate how chartered accountants are trusted business partners for their clients.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Why trusts are giving way to Family Investment Companies

For people with significant wealth, Family Investment Companies are now a more fashionable way of planning for the future, argues David Wilson of Barnett & Turner Accountants. Trusts have for many years been an option when looking at tax-efficient ways of planning for the future and helping children and grandchildren. Recent changes, however, have limited what you’re able to put into trust – in most cases to £325,000 in a seven-year period. This is one of the reasons we’re seeing more and more interest in Family Investment Companies (FICs) today, despite the fact that the concept has actually been around for many years.

To start with, just think of a FIC as a company, into which you can build different shares, rights and restrictions. It doesn’t have to trade. It can just hold different assets as an investment and it might be possible to transfer an existing portfolio of investments into your FIC, depending on whether this creates any tax charges.

So why bother? Well, assets can grow and income then becomes taxable within the company at 20% rather than at the higher rate of income tax. With certain investments – dividends from most other companies, for instance – no tax is payable at all within the FIC. You can choose then whether you want to take some income from the FIC, which shares dividends are declared upon, or perhaps you simply “draw down” some of the loan you used to set it up.

There are, of course, some downsides. You have the costs and administration associated with setting up a limited company and, in theory, your accounts are a matter of public record, which anyone is free to inspect. It could be that in the longer term, if the company pays tax on gains and you then take that out as a dividend, that you could pay more tax overall, and obviously tax rules can change in future.

So setting up a FIC isn’t necessarily an obvious and straightforward decision. I recommend doing the due diligence beforehand, and sitting down not only with your accountant, but also a financial adviser and a lawyer. There may, for instance, be implications for your will and you do need to decide when setting the FIC up who you want to be shareholders, and what benefits you want each person to get in future. By and large, however, savings in income tax will often outweigh the potential risks, and there can be longer-term inheritance tax savings too.

Here are some frequently asked questions:

How do I fund an FIC?

If you create a large director’s loan account, the company founder should be able to withdraw funds in later years with no tax implications. You may want to partly fund by loan and partly fund by share capital.

How does the tax position compare between assets I hold myself and in an FIC?

Corporation tax is currently 20% (income tax up to 45%) and there’s no tax on UK dividends received in a FIC. There are some other benefits that companies can take advantage of, as well as the differing tax rates.

How is a FIC structured?

A lot depends on what you want to achieve – one of the great aspects of FICs is they are flexible. You may have a founder shareholder, for example, who keeps tight control over the FIC, and then different classes of shares for each family member, allowing flexibility over dividends and future asset growth.

You could also still use a family trust – many FICs have trusts as shareholders. As noted earlier, there is a great deal of choice when setting up a FIC.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Free up your time with professional, strategic support

Many professional services firms – including accountants – employ a ‘practice manager’ to oversee and co-ordinate their work. Plenty of companies in other sectors could benefit from exactly the same kind of approach, writes Jono Wilson of Barnett & Turner. An increasing number of accountancy and legal firms now employ a Practice Manager to look after the day-to-day running of their own business. It’s a recognition that it’s very difficult to focus on the priorities of clients and to deliver a seamless service, unless you have someone working behind the scenes to make sure that everything is running efficiently internally.

In simple terms, the Practice or Operations Manager makes sure that whatever the business and its clients need, the structures and processes are in place to make it happen. This could involve anything from recruitment of staff through to creation of a robust IT infrastructure, management of front-of-house reception and the preparation of disaster recovery plans.

The sheer importance and variety of the role makes it highly strategic. How do we respond to regulatory requirements, for instance? What is our tolerance level for risk? And how can we make sure we manage our finance, insurance and facilities in the most effective way possible?

If you’re choosing a manager to oversee operations in your own business, my recommendation would be to ensure that they are an inquisitive person. Someone who looks at numbers and is able to see the underlying trends behind them. Perhaps they may come from an accountancy background and will have real attention to detail, along with an almost instinctive ability to spot opportunities to reduce costs.

Remember, if you’re working too much ‘in’ the business, you’re not working enough ‘on’ the business. It’s a scenario which is repeated across many growing firms. Eventually, this is likely to translate into poor profitability and low cashflow. That’s why an investment in an operations manager can make sense for any expanding company.

Is there a magic threshold or size at which you decide to act? Not necessarily. One company with a £2m turnover might be very different from another. I would make your judgement on the basis of the complexity of your business. Once the demands of running the firm efficiently are starting to undermine your ability to focus on your core role, then it might be the ideal moment to find someone who can take a lot of the burden off your hands and help give you real peace of mind.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Prepare to share

Before May’s election, many businesses were uncertain about whether they would pursue shareholder status for key employees. Now, observes Tracy Henson of accountancy firm Barnett & Turner, there’s a definite flurry of interest. One initiative of the Coalition government back in 2013 was the introduction of ‘employee shareholder status’ or ESS. With Labour signalling that it was likely to scrap the provision – which allows staff to trade employment rights for equity – there was relatively little take-up. But with the election of a majority Conservative government in May 2015, companies now have a reasonable degree of certainty that the policy is here to stay.

The essential idea is that a business owner may want to tie in employees by giving them shares. The new regime allows employers to do this in a tax advantageous manner.

For example, you might want to reward a particularly impressive Finance Director and ensure that she stays for the long term. You issue new shares to her and she pays nothing for them, as the ‘consideration’ in legal terms is created by giving up certain employment rights (see below).

These shares must be worth a minimum of £2,000. If that’s all you choose to offer, no income tax is payable by the recipient, although if you offer more, tax is due straight away on the amount above the £2,000 threshold. (While this charge obviously belongs to the individual, it’s perfectly legitimate to offer a bonus that would help to compensate the employee for the upfront bill.)

If the amount you offer is worth more than £50,000, there are restrictions on the tax advantages. There is no tax on sale at exit up to this cap, but if the shares were worth, say, £100k when they were first offered, only half would be tax free on disposal.

Although valuation is obviously a very difficult issue in many businesses, it is possible to agree figures with HMRC up front to avoid any potential dispute. It’s important to work closely with your accountants, who will be able to make the calculations – there is a prescriptive process to go through with HMRC in order to get this agreed.

A tax-free exit can seem very appealing and the owner may be looking to part with fewer shares than they would otherwise have to. It’s worth bearing in mind that entrepreneurs’ relief only applies if someone has 5% of the company, whereas under ESS they can have a smaller % and pay 0% on an exit, not 10% under entrepreneurs’ relief.

What rights does an employee give up as ‘consideration’ for shares?

• Unfair dismissal rights (unless the dismissal is related to discrimination or health and safety)
• Statutory redundancy pay
• The statutory right to request flexible working (with the exception of the two weeks after return from parental leave)
• Certain statutory rights to request time off to train

Other rights, including statutory sick pay, paid annual leave and maternity/paternity leave, remain in place.

So it’s not for everyone, and clearly as an employer you are giving away equity if you do this, but one advantage of ESS is that it is very flexible and there are not the restrictions over which type of company can do this, which there are with a number of other tax favoured schemes such as the enterprise management incentive scheme.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Worried about auto-enrolment? Here’s a ten-point plan.

Don’t panic about your pension responsibilities, writes Jono Wilson of Barnett & Turner. Start planning ahead. If you’re running a small business, the chances are you will have heard from the Pensions Regulator by now about your staging date for auto-enrolment. Although SMEs have been given extra leeway, the time is now fast approaching when you’ll need to spring into action.

The process starts by nominating a primary point of contact (usually a partner, director or someone else in a senior position) and a secondary contact who’ll handle the day-to-day operation of the scheme.

It’s important to remember that penalties can eventually rise to as much as £50 a day or more if you’ve failed to act, so there’s a strong incentive to start making preparations.

Here’s my 10-point action plan, which should see you through the initial process and ongoing administration.

1. Define and set-up your scheme.
2. Assess your workforce for eligibility.
3. Send letters to all your workers, providing details of the scheme, the contributions that will be made and the start date.
4. Enrol all workers into scheme.
5. Manage opt-outs and timely refunds.
6. Enrol new starters as well as postponements.
7. Calculate and pay over contributions.
8. Complete an auto-enrolment declaration of compliance, within five months of the scheme starting.
9. Keep up-to-date records.
10. Auto re-enrol all eligible job holders every three years.

To be ‘eligible’ in the eyes of the Regulator, an employee must be over 22, but under the state pension age, and earning more than £10,000 per year. It is possible, however, for other people to choose to join the scheme and, as an employer, you may still have to make contributions.

If you have between 30 and 49 employees, your staging date will be between 1^st August and 1^st October 2015. If you have fewer than 30 staff, the date will depend on your PAYE reference, but can range from 1^st June 2015 to 1^st April 2017. Whatever your own situation, get the ball rolling by speaking to your accountants and find out exactly what support they’re able to give you.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

A holding company? There may be no reason to hold back.

If you thought the formation of a corporate group structure was just for big multinationals, it’s time to think again, suggests David Wilson of accountancy firm Barnett & Turner. It’s a serious option for much smaller businesses too. When a limited company has built up a significant amount of wealth on its balance sheet – perhaps three quarters of a million pounds or more – and it has a large value of fixed assets, the option of creating a holding company becomes something worth exploring.

Although the formation of a ‘group’ is something you’d more normally associate with large, blue-chip corporations, there’s certainly no reason in principle why smaller companies can’t take advantage of the structure too.

When you create a holding company, you can move ‘spare’ cash and fixed assets into it from your trading company. The holding business can then rent the fixed assets back to the original company, buying any new assets itself.

Each year, dividends can be paid to the holding company, which is allowed to set up its own directors’ payroll scheme and pay your executives, while charging the trading company for its services.

There are a number of potential benefits to this approach.

First of all, the business owner’s wealth, which has been built up over the years, is protected from a potential disaster, such as losses from under-insurance. Creditors can generally only come after the trading company. You may also be able to maintain greater privacy over directors’ remuneration and possibly qualify for a less arduous audit regime.

It’s worth noting too that the creation of the new holding company gives you an opportunity to bring in new shareholders and buy existing ones out.

But do watch out. The new company structure will involve an increased admin burden in relation to year-end accounts, VAT, insurance and so on. And if you end up reducing your trading company’s balance sheet, there may be a short to medium-term hit on your credit rating. But, if you do have spare cash and are paying your creditors on time, this might not be such a big deal.

As with most planning, there are likely to be pros and cons of a new structure, so the best thing is to talk the options through with your professional advisers. They will be able to look at your specific circumstances and give you appropriate guidance.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk