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

Investors: here’s some real food for thought

Jonathan Wilson, of Barnett & Turner Chartered Accountants, says that we can learn a lot about investment strategy by turning on the TV. If you have ever tuned in to MasterChef, you will know that contestants face a series of cooking challenges. There are so many things that can – and do – go wrong. From problems with low-quality ingredients through to inadequate preparation to poor implementation.

I tend to think investing can be much the same.

There are generally two broad approaches. The first is a traditionally active one, where managers attempt to find mispriced stocks and shares or seek to time their entry and exit points from various parts of the market. This approach is akin to the challenge in MasterChef of having to invent a dish within a set time frame. The supposed advantage is the flexibility of concept. What usually happens, however, is that the chef ends up racing against the clock and is locked into certain ingredients to create a single dish. Of course, it may work out, but if they lose attention for even one second, the dish is ruined and they have nothing to fall back on.

Similarly, in the investment world, the traditionally active manager locks in on their best ideas and tends to find little flexibility to move. They are constricted by time when trying to trade on information they believe is not yet reflected in prices. If it doesn't work out, there might not be a Plan B!

The second approach to investing is when the manager seeks to track a commercial index, such as the well-known FTSE-100. The goal here is not to stand out, so the manager will be trying to avoid deviating from the benchmark. It’s an approach which is more akin to the MasterChef challenge where contestants have to cook a standard popular dish with set ingredients. The focus in this case is not on creativity, but rather on following a set process.

Of course, the recipe must be followed and created in a set timeframe. The other disadvantage of this dictated menu (or commercial index) is that it may not suit the clientele (or investor). For instance, it may be the world's best lasagna made perfectly to order, but if your diners don't care for Italian food, then you have a problem.

Now, what if we had a third approach and a system that combined the creativity of the first approach with the simplicity of the second? In this challenge, the focus shifts from being different for its own sake or following someone else's recipe to drawing from a range of ingredients to produce a diverse menu suiting a range of tastes. In this third approach, our contestants do not face unnecessary constraints either in terms of time or ingredients. Instead, they assemble a broad selection of dishes from multiple ingredients, which are suitable for the season and can be selected at times of their choosing.

This third way is the optimal approach. When it comes to investing, you don't have to outguess the market to get a good result. Neither do you have to lock in on a couple of your best ideas and hope they turn out for the best. Above all, you don't have to throw up your hands and contract the job out to a commercial index provider.

The third way is smart and sensible. Call it the MasterChef method of investing!

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

Forget the Lamborghini. Park yourself in front of an IFA

New pension rules aren’t just about people acquiring fancy sports cars, writes independent financial adviser David Wilson of accountancy firm Barnett & Turner. They also have big implications for financial planning. Much of the coverage in the press about the new pension reforms has been a little bit caricatured. There has been a lot of focus on the ability of savers to cash in and buy a Lamborghini, which probably won’t be top on the list for most people approaching retirement. Considerably less has been said, however, about how the new rules affect financial planning.

In the past, when I’ve advised clients on retirement and how to structure income, I have been confronted with a restrictive set of rules. The key factors were the tax implications – both during the retirement period and at death. We didn’t have a great deal of flexibility. There might have been situations where it would have been appropriate to strip out the pension to reduce the pot before the client died, but this action had serious income tax implications.

Things have now moved on, as a worst-case scenario at death is now perhaps a 45% charge, where the figure might once have been as high as 82% or lost entirely with annuity purchase. So leaving your money in your pension pot is not necessarily such a bad thing anymore. Pensions should be considered as part of mainstream unencumbered assets, which you can use as an income source and valuable tax planning ‘wrapper’.

Using your pension fund alongside other investment wrappers such as ISAs, you’re able to maximise net spendable income for the smallest amount of capital spend. Since the advent of the new rules, we may choose to take less out of a fund in many circumstances and make use of other assets for income, protecting the pension fund to pass it on to the next generation.

In short, we’re being presented with a great opportunity to maximise client assets. We can now plan more efficiently in relation to tax, capital preservation, succession planning and income. So if you’re keen to live a better lifestyle and pass on more to beneficiaries, then it’s definitely important to start a conversation with an IFA. Your accountancy firm may well have someone qualified to advise you or will be able to make a recommendation.

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

When you're saving, look for extra savings

Whether we’re young or old, the government is keen to encourage us to save. Interest rates, however, are at a record low, so it’s important to look for every possible advantage or tax break you can find. Here, Tracy Henson of Barnett & Turner explores the potential of the new savings allowance. Many people know about the NISAs or new ‘super’ ISAs that have been introduced, which should allow people to save up to £15,240 a year tax free in 2015-16. Savings allowances tend to receive rather less coverage in the press and on the TV and radio, however. While it’s true to say that the amounts involved are relatively small, they’re certainly not insignificant. Particularly if you’re someone who is on a modest income.

Up until the end of the 2014-15 tax year, some people with savings income of up to £2,790 would have it taxed at 10% rather than 20%. In a bid to boost savings, the government has pledged a £5,000 gross savings allowance for people with an income of up to £15,600 (the combined total coming from the savings and the personal allowance of £10,600).

To put this in tangible terms, this takes you from a maximum saving of £279 in the last tax year, to a £1,000 in the year head. Certainly not be sniffed at.

If you’re someone with earnings of, say, £12k, all your savings could be taxed at zero per cent, provided the combination of your salary and/or pension and your savings is under the £15,600 limit. On the other hand, someone who earns more than £15,600 can’t benefit at all.

In a scenario in which you have £14k income, but your savings take you above the threshold to perhaps £18k, it’s possible to claim a tax rebate on the sum between £14,000 and £15,600, but this has to wait until your self-assessment tax return, or form R40. If you fall neatly under the cap, however, you can register to receive interest paid gross.

All in all, it’s important to make the most of the allowances that are available and maximise the amount that’s due to you. If you’re trying to make a retirement income stretch further, for instance, it’s vital to keep up to date with the changes that are taking place. They’re definitely to your advantage.

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

Invest now and reap the reward

With the general election just around the corner, there’s an element of uncertainty over how the tax regime will change. Accountant David Wilson of Barnett & turner thinks that now may be an excellent time for businesses to make investments in fixed assets. In their Green Budget published earlier in 2015, the Institute for Fiscal Studies analysed the growth in overall tax take following general elections. Perhaps unsurprisingly, the think-tank found that there was a strong tendency for taxes to be hiked in the period following the poll.

One area which may come under scrutiny when a new government is formed in May is the Annual Investment Allowance (AIA), which gives qualifying businesses 100% tax relief on the purchase of qualifying fixed assets. The allowance covers most items of capital expenditure although two notable exceptions are building structures and cars.

The AIA is an allowance which has never been so good, as the cap is currently at £500,000 – a figure many small businesses are unlikely ever to approach and which offers a lot of scope for larger enterprises too.

The policy is understandable in the aftermath of the recession, as it’s an excellent way of stimulating investment and boosting the wider economy. But the increase is only temporary and is due to expire in December 2015. The Chancellor announced in his Budget speech, delivered on 18 March 2015, that it “would not be remotely acceptable” for the AIA to reduce to the previous limit of £25,000 and that a new limit will be set at “a much more generous rate”.

This leaves business owners with uncertainty as to the level of revised AIA commencing January 2016. The Chancellor indicated a better time to address this relief will be in the Autumn Statement. So we are all left waiting…

The UK economy is generally a lot stronger now than two or three years ago. It’s a time when investment is on a lot of people’s agendas. My strong suggestion is that if you are considering making capital investments in the near future, it might be best to move ahead now, while you can maximise your tax advantage within the published regime.

You may be one of the many business people who are familiar with the idea of the AIA, but not necessarily keeping a close track of the changes in the cap rate. If so, it is time to talk to your professional adviser about getting the most out of your allowances while the rules are stacked in your favour.

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

How to boost businesses tax efficiently

Investing in smaller, start-up businesses can be more risky, which is why the government offers tax incentives through specialist schemes. Jono Wilson of Barnett & Turner guides us through some of the rules. When you’re selling a business or shares in a qualifying company, it’s fairly well known that it’s possible to claim entrepreneurs’ relief, which will help limit your capital gains tax liability to just 10%. What’s more, if assets are being sold because you need to replace them, you may be able to avoid CGT liability with an application for ‘rollover’ relief.

As the economy picks up, it may be that you’re looking to dispose of investments or non-business assets which are increasing in value. The problem is that, if you’re a higher earner, your gains will be taxed at 28%. Unsurprisingly, many clients ask whether there might be a way of lessening the blow.

One tax-planning option is simply to use your spouse or civil partner’s annual exemptions, as well as your own. It’s usually a sensible approach, but the savings are never going to be huge. The joint maximum figure will be £22,000, so the most you can save is approx. £6,000. Also, if your spouse or civil partner does not already use the whole of their basic rate tax band then it might be possible to reduce tax on part of the gain to 18%.

Another possibility is that you take advice from an IFA and consider options such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which are designed to encourage support for small, unquoted companies.

The government recognises that if you invest in up-and-coming businesses, there’s a greater degree of risk attached, which is one reason why they offer relief on both income and capital gains tax, provided certain conditions are met.

With EIS, where the maximum investment is £1m, you can obtain 30% income tax relief on the total amount invested in the tax year (which can also be carried back to the previous year, if preferred). Remember, you can’t have been an employee or director of the business and your interest in the company must be less than 30%. The relief is deducted from your income tax liability, which can be reduced to zero, but no further.

On the capital gains tax front, you can defer payment by reinvesting in EIS shares up to one year before – or three years after – your liability arises. In fact, the tax can be deferred until the point you dispose of the EIS shares and can be deferred again if you make a new EIS investment. If the gain is still deferred at the time of your death, then it won’t come back into charge. What’s more, EIS shares are themselves exempt from CGT on their disposal, provided income tax relief was obtained on the investment and you have held them for a minimum of three years.

SEIS was introduced in 2012 and is designed to support companies that are perceived as slightly riskier investments. If shares are acquired within two years of the business starting to trade, 50% income tax relief is available on the total amount invested in the tax year (or, again, a previous tax year if that’s more desirable). In this case, the maximum investment is £100,000, providing relief of up to £50,000, which is deducted from your income tax liability. As with EIS, it can only be used to reduce your tax liability to zero.

SEIS shares can be exempt from capital gains tax, but the gain and the SEIS investment must be made in the same year, subject to limited carry-back rules. A difference with EIS is that up to 50% of the gains reinvested in the SEIS are exempt from CGT rather than simply being deferred.

The investments mentioned above can in some circumstances have Inheritance Tax advantages but that should be considered as part of a larger IHT planning exercise.

This information is published without the responsibility on our part for the loss occasioned to any person acting or refraining from action as a result of any information published herein.

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

You can, when you plan...

Time is ticking away if you want to do some serious tax planning in this financial year, writes Jono Wilson of Mansfield-based firm Barnett & Turner. With a general election on the horizon, taxation – and each party’s various policies regarding wealth – will be high on the agenda in the coming weeks and months. You may therefore be forgiven for thinking that the money that remains in your pocket is entirely decided by those in power. In reality, you might be more in control than you imagine.

Although this week’s budget gives us a little warning of what the future may hold, planning can only be based on the here and now, starting with the approach of the end of the tax year.

It’s hard to believe, so soon after the 31st January self-assessment bombardment, that there are only a few weeks remaining of the 2015 tax year to plan and adapt.

Tax planning itself will vary in complexity between individuals, but there are a number of things that we all should look at before 5th April 2015 in order to ensure we don’t miss out:

Individual Savings Accounts (ISAs)

Have you taken advantage of your full annual entitlement to these tax-free accounts? The regulations for 2014/15 were relaxed last summer, meaning that you have an annual allowance of £15,000 which can be invested however you choose. The ability to select between cash and/or stocks and shares gives you much greater flexibility than ever before.

Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS)

Investments in these schemes may bring an increased risk, but the tax breaks are attractive. Is now the time to consider whether the relief offered is worth the additional risk?

Pension Contributions

Have you used your full annual allowance of £40,000? Is there any unused allowance from the previous three tax years that you could take advantage of too? Remember, relief from 2011/12 tax year must be used by 5th April 2015.

Personal Allowance

With a tax free earnings allowance of £10,000 per person, it may well be that planning between spouses is necessary in order to obtain maximum advantage. At the other end of the scale, the personal allowance decreases by £1 for every £2 that your adjusted net income exceeds £100,000, giving nil allowances to an individual earning £120,000 or above. Could your adjusted net income perhaps be reduced via pension contributions and gift aid?

Capital Gains

Remember to make use of your Annual Exemption of £11,000 before the end of the tax year. This exemption is per individual, so think carefully about the ownership of any assets that you intend to sell.

Capital Allowances

Consider the timing of asset purchases. Would it be beneficial to buy earlier, in order to take advantage of the allowances at the earliest possible point in time?

It’s easy to see that it’s a really great time to take careful stock of your finances, but the suggestions above are only a starting point. Are you doing everything that you can to help yourself? Why not sit down with your accountant and draw up a plan for maximum tax efficiency?

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 mentor could be a motor for your business

Forward-thinking businesses will often recognise the need to offer their FDs and senior executives independent advice and guidance, writes Jono Wilson of Barnett & Turner. And it may be that accountancy firms are uniquely placed to step into the role of mentor. Let’s imagine a scenario in which someone has newly been appointed as Finance Director of a business, perhaps after a number of years as an accountant. The company sees their potential and knows they’re ready for a new leadership role, but it’s not always a straightforward transition to make. The advice of an impartial mentor can be a great confidence boost and help to solve a number of practical issues – at both a tactical and strategic level.

Accountancy firms will often be able to offer a mentoring service to their clients. Five key areas in which a mentor can help a busy FD or business owner include:

Setting the company’s financial scoreboard – not merely looking at the accounts, but communicating meaningful information to the wider management team.

Forecasting financial requirements – thinking about cashflow, the input that may be coming from external funders, dealing with the bank and addressing invoice finance.

Managing the accounting function – building a team, although not necessarily working within it.

Liaising with external professionals – providing the tools to help in proactively managing professionals such as lawyers, bankers and financial advisers.

Managing corporate finance and capital requirements – overseeing the investment of venture capitalists, as well asset and bank finance.

In practice, there are a number of different ways of managing the relationship with your mentor. It can be as structured and formal as you need it to be.

You can meet together for, say, an hour and a half on a monthly basis and simply tackle the biggest issue that’s currently on your agenda. But you can also use the session to start drawing up a road map for the next six months. Or look ahead over a three or five-year timescale if you happen to be, for instance, the owner of a small business who’s looking for an exit strategy.

Ultimately, though, you can think of a mentor as someone who can help to grow your business and be a sounding board. Perhaps they’ll make a very obvious difference – helping you to access money from a venture capitalist when a bank refuses to lend, for example. Or it may be that they’ll simply offer you sound, impartial advice that will allow you to make steady progress month by month.

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

Changes To Taxation Of Pensions On Death

Hot on the heels of the relaxation of the rules on pension drawdown earlier this year, the Chancellor announced at Party conference that he intends to abolish the 55% tax charged in certain circumstances on the balance of undrawn pension funds at death. This creates further flexibility in pension planning which should now be given greater priority in your financial plan. At present a pension fund can only be passed down tax free on death if the individual has not drawn anything from it, including the tax free sum, and is aged under 75 on death, otherwise there is a 55% tax charge on the fund. This has prompted some individuals to draw down the maximum amount available each year during their lifetime on the basis it only suffers a maximum 45% income tax charge. There are however restrictions on how much can be drawn out of the fund each year during an individual’s lifetime, but these restrictions are set to be removed from April 2015.

Now that the 55% tax charge is due to be abolished from April 2015 it will prompt those drawing a pension to reconsider the amount they draw, safe in the knowledge that what they leave behind will not suffer a tax charge on their death and can be passed down. Under these new rules if the death occurs before the age of 75 then the undrawn fund can be withdrawn in full by the beneficiaries tax free but a death after 75 results in an income tax charge on the beneficiaries as they draw it down.

If the fund is not fully drawn down by the beneficiaries in their lifetime then it can pass down to the next generation on their death, thereby creating a situation where pension planning today can be beneficial for a number of generations. These are clearly quite progressive changes and will offer much more scope on pension planning in the years to come. It will also remove one of the biggest criticisms of pension schemes, the restricted access to the fund which currently exists.

Exciting times ahead!!

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

Property ownership: a talking point for husbands and wives

The way in which you share ownership of property with your spouse can have big financial implications, writes Tracy Henson of accountants Barnett & Turner. When a husband and wife buy a house together, they are usually ‘joint tenants’, which means they have equal rights to the property. In the event that one of them dies, the home will automatically pass to the other partner, but it’s only possible to sell or remortgage with the other’s consent. A good analogy is to think of the property as a bowl of soup. It’s not possible to cut it in half.

If you’d prefer your property to be more like a cake which can be sliced in various directions, then it’s essential that your legal status is as ‘tenants in common’. This allows for different shares of the property to be owned by the two partners.

Imagine a scenario, for instance, in which you own a second home and rent it out. If your spouse is working and is a higher-rate taxpayer, but you earn a lot less, it makes sense for you to receive the rent as income. That way, you’ll end up paying a lower marginal rate of tax and help to protect your child benefit at the same time, as you could avoid your partner heading over the £50k threshold established by the government.

It’s worth bearing in mind though that HMRC will, by default, consider you to be joint tenants, so you need to make your status clear and legally watertight. It’s usually a simple matter, if both of you agree. You just need to arrange to make a declaration of trust stating the way in which the shares are owned. Alternatively, one partner can issue a notice of severance. The co-owner simply has to acknowledge receipt. Either method then also requires a form to be sent to the Land Registry.

Most of the time, I would advise my clients that the minority shareholder in the property should retain at least a nominal 1% stake. Remember that you’re not just splitting ownership of the income, but also the underlying ownership of the house or apartment, which calls for a great deal of trust. If a husband, say, has all the earned income in the household, while the wife receives the proceeds from property, this may be good news from the perspective of income tax liability, but may not be an ideal scenario in relation to Capital Gains Tax and inheritance tax. So talk through the options with your accountant before making any fundamental decisions.

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