Size doesn’t matter
Why you need a Lifetime Business Tax Plan
For those business owners that have reached the milestone of a healthy balance sheet and decided to invest some of their cash in property, shares or other assets classes, it is a shock to learn that regardless of the size of your company, HMRC will take 40% of your balance sheet; that is unless you have a Lifetime Business Tax Plan.
The starting point for HMRC is that tax is due on almost everything, and the same applies to those that own small companies. HMRC are entitled to 40% of the balance sheet unless the company owner(s) have a Lifetime Business Tax Plan. The reason that the tax man can take this much is owing to the company having inadvertently changed from trading company status to investment company status, whether investments have been made or not. This is because company cash, yes cash, is treated as a form of investment. So, even if you do nothing with your cash balance, you will still have become an investment company subject to the aforementioned tax charge.
A trading company is any business (large or small) that trades some form of product, whether tangible or not. In contrast, an investment company is a company that derives profit from investments that it owns. There may be no difference in how these two types of company are operated and managed, but the important point is that the former is entitled to tax relief, known as Business Property Relief, on all the value of the company, whereas the latter is not.
BPR is a tax relief that can be claimed to reduce the tax due on the shares in your company from 40% to 0%. Legislation introduced the relief in 1984 with the result being that the owners of trading companies, large or small, would not pay any additional tax on their company value. The exclusion is that a company involved with any kind of investment is not entitled to the relief and this is where business owners, often accidentally, fall foul of the legislation. HMRC apply a 20% test to determine whether a company can claim BPR or not.
To be able to successfully claim BPR and not pay tax on the value of your company, a series of tests are applied by HMRC. The tests use a 20% threshold and only one of them needs to be broken for HMRC to lay claim to 40% of your company cash value. The tests individually examine the amount of cash or value of investments held against turnover, profit, the balance sheet, and even the amount of time spent by a director on managing investments, to determine if any of these breach an amount of 20%. In practice this means that if for example the cash balance in the company account was £50,000 and the turnover of the company was £100,000, then the 20% threshold is breached and the company loses the right to claim BPR. A quick review of some first-tier tax tribunal decisions on the 20% tests does not make good reading for those business owners who have managed to build up cash reserves in their company. All is not lost though because a Lifetime Business Tax Plan will mitigate the situation and return the tax due to 0%.
A Lifetime Business Tax Plan is a plan that enables company cash or investments to be held and controlled by the company owners, but without being subject to a 40% tax charge. Essentially, the cash and assets are all held in trust for the benefit of children or grandchildren. Ultimately, this is where most of a business owner’s assets end up, so why would anyone threaten their family’s inheritance with a possible 40% reduction? A Lifetime Business Tax Plan completely removes any ambiguity in relation to whether your trading company has become an investment company or not and ensures all of your company assets end up with your family and not the tax man.
There are two elements; an Investment Trust Fund (ITF) and a Small Self-Administered Scheme (SSAS). The ITF is the account where company cash can be moved to reduce the 40% charge down to 0% and the SSAS is where profits from your company investments can be paid to reduce tax on these gains to 0%. A win-win and just for once, legislation supports the plans.
When did Investment Trust Funds and Small Self-Administered Schemes first become available to business owners?
Investment Trust Funds are the result of changes to tax charges on trusts that have been applied since 2006. ITFs became more popular because there is no upper limit on values whereas Trusts are limited to £325,000 at 0%. Small Self-Administered Schemes have been available since the mid 70s and are popular with small-medium sized business owners.
Most accountants and financial advisors (but not all) are not tax advisors and do not have the mindset of an entrepreneur. They are hopefully great at the job they are employed by you to do, but it is probably not their job to advise on a Lifetime Business Tax Plan. Although both an ITF and a SSAS are primarily tax products, the SSAS element crosses over into a financial product and so accountants tend to steer clear, with the same scenario being true of a financial advisor and an ITF. We are the bridge between the two products combining them into one simple solution that will keep your taxes low or even zero, whilst giving ultimate flexibility and control over investment decisions.
Plans can hold any investment from residential property to crowdfunding or shares. The business owners are in full control and make their own decisions. We can also help with information on certain types of investment.
The process is very straightforward. We are registered with HMRC as trust and company formation agents and also as SSAS administrators. We handle all the paperwork, set up and register the plans with HMRC and you then make the investment decisions safely, in the knowledge that HMRC cannot take 40% of your trading company. We also undertake all annual compliance reporting and modifications to the plan that may be required in the event of new directors or even new children!
We need to ensure that you qualify for the plan so we provide a 40-minute complimentary review by zoom or teams, which can be undertaken at your convenience. A meeting with one of our Corporate Investment Consultants can be booked below. We can answer your questions and help you to understand the benefits of a Lifetime Business Tax Plan in greater depth.