Business Planning

Whether making strategic decisions, managing staff or building relationships with customers, running a business takes time, focus and energy. In our experience, business owners often don’t have the time to pay enough attention to their own financial planning goals. In addition, business efficiency can also be improved by sensible financial planning. Indeed, as the prospects for your business and personal financial goals are closely aligned, seeking tailored financial planning advice can assist business owners to plan ahead for the future with confidence.

At FAS, our experienced advisers can help business owners meet their financial objectives. In this article, we take a look at three common scenarios where the independent advice we have provided has proved beneficial.

Scenario 1  – Profit extraction via pensions

Business owners need to decide the most appropriate method of extracting profits from their business to fund their ongoing costs and lifestyle. Most business owners that we advise pay themselves a modest salary, and receive funds to cover their personal expenditure via dividends. But what about profits made by the business in excess of their living costs?

Profits made by a business are subject to Corporation Tax, which is charged at 25% for companies with profits over £250,000; however the rate reduces to 19% for small businesses with profits under £50,000. This tax charge can effectively be saved if the company arranges a pension contribution on behalf of the business owner, as such contributions are usually treated as a legitimate business expense and deductible from profits liable to Corporation Tax. Furthermore, there is no National Insurance liability either, which would be the case if the additional profits were drawn as salary.

Pension planning using Employer Contributions can be a very sensible and tax efficient method for the business owner to reduce their company’s Corporation Tax bill, and build up retirement savings for their future use. This is particularly powerful when business owners move closer to retirement, as funds drawn through Employer Pension Contributions could be accessed if required.

Tax legislation does, of course, change from time to time, and the new Government could bring about changes in pension legislation. We therefore recommend seeking advice before taking any action.

Scenario 2 – Protecting business interests

We often come across business owners and shareholders who don’t consider the potential impact of the death or serious illness of a business owner or key staff member. This could mean years of hard work are placed in jeopardy, and could compromise a business owners retirement plans.

Losing key personnel to death or serious ill health could have devastating consequences for the future success of the business and its’ employees. Some businesses may even face wind up or closure due to the loss of an individual who is vital to the success of the business. Key Person protection is an insurance that provides a cash benefit to the company in the event of the death, diagnosis of a terminal illness, or a specified critical illness, of a key individual in the business. The funds paid through the policy could be used to help cover any potential reduction in profits as a result of the missing individual, meet ongoing business expenses, or pay for recruitment and training costs for a replacement.

We have also seen instances where the structure of the business could potentially lead to difficulties in the event of the death of a shareholder. It is quite common for a shareholder in a small business to prepare a Will that leaves their shares in the business to their spouse or children on death. This is understandable, as the value of the shares are then left to the benefit of family members. That being said, the spouse or children may not have any interest in being a shareholder in the business and may prefer to sell the inherited shares to other shareholders. This may also be the desired outcome from the other shareholders’ perspective.

The shares will, of course, have a value and other shareholders may have difficulty raising the necessary finance to purchase the shares. This is where a Shareholder protection policy, arranged in an appropriate manner under a Trust arrangement, can provide the necessary funds to the other shareholders so that the deceased shareholder’s shares can be purchased from the estate.

Scenario 3 – Keeping business cash productive

We have come across many successful firms, who have built up substantial balances in cash. Naturally, some of these funds will be needed for day-to-day cashflow; however, funds that are truly surplus to these requirements should really be working hard for the business, and more often than not, they simply languish on a business bank account earning little, if any, interest.

The obvious first step is to look for business deposit accounts that pay more attractive rates of interest. Many banks offer such accounts, but rates of interest differ greatly. At FAS, we have assisted business owners in finding suitable deposit facilities to keep surplus funds productive.

Many business owners are unaware that businesses can make capital investments using business funds, which are held in the name of the company. Where excess funds held by a business are unlikely to be needed in the short or medium term, investing in a diversified portfolio of investments could generate superior returns over time and potentially lead to growth in the value of the business. Corporate investments are an area where specialist advice can add significant value, not only in terms of selecting an appropriate investment strategy aligned to the investment time horizon, objectives and tolerance of investment risk, but also to make sure the investment will not have any impact on the status of the company, which could lead to adverse tax consequences in the event of the sale of the business in the future.

Saving business owners time and money

As demonstrated above, there are many ways that independent advice can help business owners achieve their personal financial planning goals and help grow their business. In addition to the services described in the three scenarios above, our experienced advisers can also provide independent advice on a range of employee benefits, such as death in service and private medical group policies and help establish group pension plans. Speak to one of the team to start a conversation about the ways we can assist.

Why business owners need to find time to focus on financial planning

As anyone who runs a business will appreciate, time is a precious commodity. Making strategic decisions, effectively managing staff, and building relationships with customers and suppliers mean that business owners rarely have time to consider the important role that sensible financial planning can play in both the success of the business and the long-term financial security of key individuals.

Profit extraction via pensions

Whilst the long-term goal is to make the business more successful over time, business owners need to make sure that they don’t ignore their personal finances and in particular their retirement plans. By making regular pension contributions, business owners can save for retirement in a tax-efficient manner. Depending on how the business owners are remunerated will determine the most tax-efficient way that pension contributions are made, and we recommend business owners seek independent investment and accountancy advice to choose the most appropriate route. Pension planning can be particularly useful when business owners near retirement, providing a tax-efficient method of extracting profits from the business.

Protecting your interests

In our experience, many business owners, shareholders, and key personnel are running huge risks by not holding adequate protection against the worst-case scenario. The death or serious illness of a business owner or key individual in the business could have devastating consequences for the future success of the business and its employees.

A situation we commonly come across is where a shareholder in a small business leaves shares in the business to their spouse on death. However, the spouse may not have any interest in being a shareholder in the business, and would prefer to sell the shares in the business to other shareholders. This would involve other shareholders needing to raise finance to buy the shares, which often can be prohibitive. By arranging shareholder protection in an appropriate manner, life assurance would be arranged in a tax-efficient way to provide the necessary funds for the surviving shareholders to buy the shares from the spouse.

Another common risk that is often ignored is the potential for death or serious illness of a director, owner, or key member of staff, without whom the business would face significant risks to profitability and success in the future. By arranging appropriate cover, in the event of ill-health or death of the key employee, policy proceeds are paid directly to the business to help replace the key person and help cover any profit loss.

Benefits to retain key staff

A crucial component of any successful business is the ability to recruit and retain key staff. As an indirect result of the pandemic, some industries have faced an imbalance between vacancies and applications, exacerbating the need for employers to stand out from the crowd. One method of achieving this is to offer key employees a strong package of employee benefits, which can be arranged in such a way that they are tax-efficient for the business. Death in Service, essentially a group life policy, is a cost-effective way of providing life assurance for key staff. Additionally, arranging a Group Private Healthcare policy is another attractive benefit that can work to the benefit of the employee, and also the employer, as a way of ensuring that staff return to work as quickly as possible after suffering ill-health.

Another valuable benefit is for business owners to arrange enhanced pension arrangements for key personnel. Whilst many firms choose to use a Master Trust arrangement such as NEST or People’s Pension to provide their employees with a pension under the auto-enrolment legislation, these schemes tend to offer employees limited choice and can be expensive. By providing key staff with bespoke pension advice, and setting up a Group Personal Pension or Individual Pensions, this can provide staff with a greater range of options and competitive terms.

Making company cash work harder

Many successful firms tend to carry large balances in cash, and if these accumulated funds are not earmarked for any business purpose, leaving surplus funds on a company bank account will mean that funds are left unproductive. In particular, given the current levels of inflation at present, cash is generally producing a negative real return (i.e. taking inflation into account) of around -5% per annum. Business owners should consider funds that truly are surplus to immediate requirements (but might be required in the longer term business strategy) and consider alternative options that aim to keep funds productive. This can be in the form of term deposits or other interest-bearing cash, or a cautiously managed investment portfolio, aiming to produce positive returns over time, with lower levels of volatility. Business owners should always seek advice before proceeding, as investing significant sums could have implications in respect of the trading status of the company; however, we will be able to work with your company accountant to avoid any adverse consequences.

How we can help busy business owners

It is our experience that business owners generally appreciate the benefits that independent financial planning can bring, but rarely have the luxury of time to consider these options in more detail. That’s where FAS can assist. As a Chartered practice, we can provide a comprehensive service, considering a company’s protection needs, implementation of employee benefits packages, and reviewing business owners’ personal finance, thus avoiding the need for business owners to deal with these aspects individually.

If you are interested in speaking with one of our experienced financial planners to review your business needs, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

No business owner can afford to keep on an employee that doesn’t pull their weight, and the same is true for your working capital. If you’re a business owner with a significant chunk of cash sitting in a bank account, now might be the right time to start making that excess money work harder on your behalf, without taking too much risk.

Having a lot of cash at hand is considered a positive state of affairs for any business, and a sign of a company in good health. Not only does holding large sums of balance sheet cash demonstrate that the company itself is well capitalised, but it can also give the business owner and any major shareholders valuable reassurance that the business is positioned to face any challenging times in the future.

Is cash still king when it’s not earning its keep?

While it makes sense for the business to retain enough liquidity to see it through any potential issues, excess working capital does present many business owners with a dilemma. That hard-earned capital is most likely to be just sitting idle in the business bank account, not generating any meaningful kind of return.

During periods when interest rates are low and inflation is starting to creep up, such as now, having too much capital held on deposit starts to become worryingly expensive. Moreover, for smaller businesses, particularly family-run firms, having too much cash in the bank could potentially have a negative impact on your business and your longer-term wealth. It could mean paying higher taxes or alternatively, missing out on claiming valuable tax reliefs. Therefore, getting the balance right when it comes to managing your excess business cash could prove very significant in the years to come.

Tax planning considerations – Business Relief

In our experience, lots of smaller businesses, and especially family-owned businesses, benefit from being eligible for Business Relief. First introduced back in 1976, Business Relief (BR) makes it easier to pass on the ownership of a business from one generation to the next. As the shares of companies that qualify for Business Relief are exempt from inheritance tax, this means the shares can be passed on without triggering an inheritance tax bill that could potentially force the business to be sold.

However, in situations where the company is found to be holding cash in excess of its business needs, HM Revenue & Customs can restrict the amount of Business Relief available to shareholders upon the death of the business owner. This could result in shareholders facing an inheritance tax charge on the value of their company shares and reduce the amount of the estate the business owner intends to pass on to beneficiaries.

Tax planning considerations – Business Asset Disposal Relief

There are other issues that business owners should be aware of. For example, Business Asset Disposal Relief – which used to be known as Entrepreneurs’ Relief – is a government-approved incentive that makes it possible for business owners to pay a reduced rate of capital gains tax (as low as 10%) when they choose to sell all or part of their business.

Should the company be holding a large amount of surplus cash or other non-trading assets when the shares in the business are sold, or when the company ceases trading, this could result in HM Revenue & Customs restricting the availability of Business Asset Disposal Relief and trigger a larger capital gains tax bill.

So, there really are several good reasons why it makes sense to rethink the amount of spare capital your business is holding onto and think about ways to make that cash work a bit harder.

What we can do

At Financial Advice & Services, we work closely with business owners to provide a range of services based on the highly individual needs of their business. While recognising the importance of keeping an appropriate level of cash within the business, we can use our investment and tax planning experience to invest significant surplus funds more productively. As well as recommending investment strategies that aim to produce a healthy rate of return without taking on excessive risk, we can also take a closer look at your individual tax status, and work out which tax reliefs are valuable to you. We can then suggest investment products and services that will allow your business to invest its spare capital in ways that ensure these valuable reliefs are not lost.

At FAS, we know from our conversations with business owners that cash gives them a much-needed cushion during difficult times. So, we understand the need to not take any undue risks. But for many businesses, we think it makes sense to make sure every penny earned by the business is being put to good use, and earning a positive return, rather than sitting idle.

If you are interested in discussing tax planning strategies or business investment options with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Business protection is all about preparing for the worst, so your business has the best chance of reaching its full potential. It can help you to keep trading and financially afloat should things go wrong, which, in light of the COVID-19 national lockdown, things broadly have. In April 2020, most businesses remain closed under Government guidelines, with airlines grounded and sectors such as hospitality and retail suffering heavy financial losses.

Of course, no business owner could have predicted the effect COVID-19 would have on the economy. Yet for some businesses that are continuing to keep going during the crisis and for those that will resume post lockdown, there are still things that can be done to enhance your business financial protection.

Here is our short guide for business owners.

Protection & business type

Financial protection can come in many forms depending on your business goals, strategy, size and stage in its life cycle. In February 2020, there were nearly 5.9m private businesses across the UK; the vast majority (99%) comprising small or medium-sized businesses (SMEs) with under 250 employees. When added together, these businesses form a huge part of the UK economy, employing 16.6 million people.

There are many factors which keep businesses afloat, such as product development and strong distribution networks. However, a crucial (and often neglected) factor is business protection infrastructure. In other words, what would happen to your business if either you, or another key person, could no longer work because they became seriously ill, or even died?

This has always been an important question for a business, but in light of COVID-19, it has become even more poignant. None of us knows what’s around the corner, even if we do not believe the worst could happen to us or someone we know. Unfortunately, we are able to recount cases from our own experience, where a company took out protective cover, and only a few years later a Key Person within the organisation (e.g. the Director) sadly passed away.

Unfortunately, financial protection cannot prevent tragedy but it can help soften the blow. We can help you identify the weak points in your protection plan and find the best solution for your situation.

Succession planning

Whilst all businesses are different, one common issue centres around succession planning; i.e. who will take over should the Director/owner die, or suddenly become incapacitated (e.g. through a serious accident). At FAS, we can work with your Accountant and Solicitor to help you craft both a short term and long term succession plan. The first plan is most important, as it assists in addressing the more pressing issues that could occur if the business leadership is severely disrupted. The second, however, involves developing a tax-efficient plan to eventually transfer leadership to new management, usually after the current Director/owner reaches their intended retirement date. This might take the form of handing the reins to a trained family member, appointing an external successor or even business disposal. Regardless of the situation, careful planning is needed to ensure livelihoods are protected and liabilities are addressed.

Key Person protection

In the case of a sole trader, one of the key protective measures you might want to consider is Life Insurance. After all, since your business largely rests on your own shoulders, if you die suddenly then it will be considered as part of your Estate for Inheritance Tax (IHT) purposes. A lump sum from a good Life Insurance policy can help ensure your beneficiaries have the liquidity they need to wind up your business or take up the reins whilst dealing with any debts in your name.

For joint partnerships and Limited Liability companies, however, things work differently due to the share structures involved. Suppose one business partner in a joint partnership dies; what happens to their shares? Typically, these will pass to their beneficiaries, usually a surviving spouse. Unless you (the surviving business partner) have the funds and written agreement in place to ensure you can buy these shares, your business will run the risk of being held back by a stakeholder who has no interest or experience in stepping in to take the deceased’s place.

Once again, this is where our experience in dealing with such matters can really help. We can help you come to a binding agreement with your business partner which addresses the above scenario, and releases the funds you need to buy the deceased’s share(s) or we can assist with the arranging of a Key Person protection policy to guard against the loss of a key person. The right type of cover can help release the funds you need to help meet commitments, without rocking the entire ship.

If you are interested in discussing any of these aspects in more detail, please do give us a call.