Pay no tax when you sell your company… EOT

Most owners get Entrepreneurs Relief and so only pay 10% on the Capital Gain when they sell their business…  many are not aware there’s a 0% tax option…
Transfer controlling interest to an Employee Ownership Trust (i.e. sell the business to the employees) and you pay no CGT (and no Income Tax and no IHT) on the gains…
And the employees get tax benefits as well…
What’s not to like?

Why sell to an EOT?

  • You get to sell at full market value… to people you know… very quickly… and cheaply… and without the normal hassles of selling a company
  • And there are NO capital gains, income or inheritance tax liabilities …

Do all existing shareholders have to sell all of their shares… ? … no

Can existing directors (you?) stay on and get paid…? … yes

So how’d’s’t work

  1. EOT established
  2. The shareholders sell their shares (at least 51% of the company) to the EOT
  3. This creates a debt owed by the EOT to the shareholders
  4. Trading profits in future years will be used by the EOT to repay the debt to the original shareholders

Qualifying conditions… roughly

  1. The company must be a trading company (or the principal company of a trading group)
  2. The trustees of the EOT must spread the shares to eligible employees on the “same terms”… (and in general Trust property should be used for benefit of all eligible employees)… but…
  3. The trustees may distinguish between employees on the basis of remuneration, length of service and hours worked
  4. The trustees must hold, on an ongoing basis, at least a 51% controlling interest in the company
  5. The number of continuing shareholders who are directors or employees (and any person connected to them) must not exceed 40% of the total number of employees of the company or group

Fancy it?… here’s a great article from BDO   and a Tax Insider article

Gifting Shares… if you’ve got to…

So you want to give some of your shares to staff or family members?… it may trigger a Capital Gain Tax bill for you, and an Income Tax bill for them… even if no money has changed hands… so some care is needed

Gifting Shares to Employees

Don’t do it… simple as that… if you give them shares it’ll most likely be deemed to be ’employment related’ and they’ll get an income tax bill they won’t thank you for… (of course you could always pay that bill for them if you’re feeling really generous / loopy) …

… and they & the company will have to cough up NI contributions as well…

There are much better and more tax efficient ways to get some shares into an employee’s hands…. see EMI…

Gifting Shares to Family

Gifting to family (and non-employees) can be done totally tax free if care is taken…

Here’s the basics :

… when you give away shares it’s classed as a disposal at market value and triggers a Capital Gains Tax liability…

But… you can claim Gift Holdover Relief... which, to paraphrase HMRC,  means you do not pay Capital Gains Tax when you give away the shares… instead, the person you give them to pays Capital Gains Tax when they sell them…

All you BOTH have to do is fill in a simple form and the gifting of your shares will be CGT and Income Tax free… (it’ll even be Stamp Duty free if you claim Stamp Duty Gift Relief Exemption)

But what if the family member is an employee too ?

Aye, there’s the rub… gifting shares to employees is normally treated as Income Tax-able… but if it can be demonstrated that the gifting of shares is for reasons of family or personal relations, the income tax charge should be avoided…

eg… 2 kids… 1 working in the business, 1 not… only gifting shares to the 1 in the business may seem more like a reward than a gift???

And do you really need to do it now?

Gifting to a family member now may run the risk of a CGT or IT bill (eg if it is deemed employment related)… but leaving it in your will will avoid all taxes because shares in your trading company sit outside your estate on death…

(for IHT purposes a Trading Company is one that has no more than 50% non-trading activities…)

Gift now… or leave in Will… ?

It’s all about the ‘base cost” of the shares the receiver is getting…

Gifting… if you Gift the shares and get Gift Holdover Relief  the receiver’s ‘base’ cost for CGT purposes is the original cost of the shares to you…

Leaving in will… the shares will be IHT free due to BPR… and the base cost of the shares to the receiver will be the value at the time they receive them from your estate…

example… You founded a company with the typical £1 share start up company structure… 10 years later the company is worth £10m… and 1 year after that it is sold for £15m…

  1. gifting these shares when they were worth £10m would mean the receiver would pay CGT on the full £15m sale price when they sell the shares… (CGT at 20% would mean a £3m tax bill)
  2. if you left these shares in your estate rather than gift them and died in year 10… the shares would transfer free to the receiver, and establish their base cost at £10m… on selling the company the receiver would pay CGT on only the £5m gain in value from the £10m value when they received the shares… (CGT at 20% would mean a £1m tax bill)

Of course there are reasons for choosing Gifting over Willing (wanting to pass on control of the company… to incentivise the receiver… etc)… but from a tax point of view… inheriting shares rather than being gifted them will end up in a reduced CGT bill for the receiver… over time… should the shares ever be sold… !

Gifts With Reservations… a rather obscure IHT Trap…

Gifting shares to reduce exposure to Inheritance Tax (IHT) whilst continuing to benefit from the gifted shares may be caught by GWR anti-avoidance rules… if so, the shares get put back into the giver’s estate for IHT purposes…

The giver can continue to receive reasonable commercial remuneration for their work in the company… but HMRC say if as a part of the transaction ‘new remunerative arrangements are made you will need to examine all the facts to determine whether the new package amounts to a reservation’

Tax Insider 162

Trust a trust?

Trading companies for IHT purposes (no more than 50% non-trading) qualify for Business Property Relief (BPR) and so there are no IHT liabilities on gifting their shares… so placing shares into a family trust in which the children are beneficiaries will not generate a tax charge under IHT or GWR rules… even if the parents are trustees and get paid for their efforts (but votes from the shares must be used in the interests of beneficiaries)

Tax Insider 162

Mind The Gap !

If you can foresee your company breaching the 50% non-trading company limit for IHT purposes… consider gifting the shares before you exceed the CGT non-trading company limits of 20%

Say… right now you have a 100% trading company… but as profits grow and funds are left in the company it will invest in property… 20 years of that and you may have a company that breaches the 50% limit for non-trading activities when it comes to IHT… so… it may be best to gift the shares before the company breaches the 20% non-trading CGT Gift Holdover Relief threshold

(although one aggressive interpretation of the non-trading rules says it only has to be a trading company at the time of gift..)

If Gifting shares is a problem… just issue new shares instead?

O no you don’t ! … TCGA 1992 says effectively that if a person who has control over a company exercises it in such a way as to cause value to pass out of that current owner’s shares and into other shares in the company it will be treated as a disposal of the existing shares.

Tax Insider Business 84

Part Payment won’t work either! …

The difference between the payment and the market valuation of the shares would be a benefit that would be subject to income tax (and NI)

Undervaluation wrinkle…

… if the share transfer was deemed to be below market value HMRC could seek to tax the difference as employment income. If you want to protect the employee from a nasty IT bill later you could include a consideration adjustor clause in the contract around the share transfer so that the consideration is altered to the HMRC agreed amount upon any successful challenge by them of that share value (Ballards)

Gifting Tax Summary… rough… for shares in a trading company (or the holding company of a trading company)

IT… employee may suffer it if deemed employment related (or even disguised remuneration)

NICs… company and employee may suffer NIC if employment related

CGT… should be no problem if Gift Holdover Relief claimed…  claim has to be made by giver & receiver (company must be no more than 20% non-trading)

IHT… shares in trading company should attract BPR so should be no IHT issues (outside of estate) … (company must be no more than 50% non-trading)… take care with post gift remuneration packages / arrangements because of GWR

SD… should be no problem if SD Gift Exemption relief claim

Take care it is a trading company… if the company has ‘chargeable non-business assets’ (eg  investment property) the gift relief may be restricted

and here’s an article trying to hustle up fees for tax advisers

Ross Martin link

 

 

Innovate

R&D tax reliefs and grants work … will Patent Box work better?

Innovation is one of the best drivers of growth for an owner managed business… and luckily the Government really does get it… offering some bonkersly brilliant and accessible help that actually works for companies like yours…

As a form of Corporate Welfare (which I’m generally against) these innovation-orientated tax breaks and grants rather surprisingly do what they’re supposed to do… boost productivity and create jobs (which I absolutely love)

Innovate UK are busy getting grant money out to innovative firms… and, as the Enterprise Research Centre recently reported, the range of grants available has made a real impact… Over a 13-year period, R&D grants spurred growth worth £43bn to the British economy – more than five times the £8bn invested – and created around 150,000 jobs

… one helluva an ROI

But R&D Tax Reliefs  are doing even better imo… not only does research suggest this tax saving for SMEs is working financially…  Our current evaluation suggests that for each £1 of tax foregone, between £1.53 and £2.35 of R&D expenditure is stimulated… I believe it is changing the mindset of some of the companies applying…  

What started out as an attempt to justify a claim for a extra tax deductions and get money back from HMRC… is morphing into a mindset shift for the companies involved as they start to genuinely put innovation at the heart of what they do…

And I think the Patent Box could take that shift towards innovation to a completely different level…

The tax relief for having a Patent is now so good that companies I tell about it immediately start to think what they are doing or can do that’ll lead to a narrow patent and get them a 10% Corporation Tax rate for a couple of decades…

Changing minds is surely one of the hardest things for a Government to do… but, because of these innovative tax reliefs, minds really are changing when it comes to innovation

Here’s a couple of older blog posts on the subject…

R&D Relief

First Claim

Patent Box

And a great (if slightly technical) site for keeping up to date with any odd updates to the tax reliefs…

Keeping tabs on changes to reliefs

 

 

 

Dividends instead of Salary

Dividends instead of Salary… don’t do it !

There’s only one reason to pay yourself Dividends instead of Salary… to avoid a bit of tax / NI… but here’s 5 reasons not to…

Dividends are not ‘relevant earnings’ for pension purposes.. so payments into your pension can’t be deducted from any Dividend income… but they can be from any Salary

Salary makes your affairs simpler, clearer… with tax paid as you go along… minimising lumpy shocks & payments of extra tax in January & July

Funders don’t really get you paying out their money as Dividends… try telling some of them you’re paying yourselves that way to avoid paying some tax & see how they like it… particularly if you’re trying to raise new money… (I know a Bank Manager who absolutely hates it)… and if you’re looking to work with Venture Capitalists & Angels they’ll often put constraints on the company paying out Dividends

R&D tax reliefs are now so generous that companies will often forego a Grant to keep the tax relief… a Salary for someone working on R&D (that’ll be you too as the company Owner Manager) attracts a lot of relief… Dividends don’t count

Overdoing the Dividends can turn ‘Profits to Losses’… not strictly so… but taking out too many Dividends in any one year can shrink your Balance Sheet… making it look like your company made a loss… when it may have made a Profit… which’ll hurt your Credit Ratings

So… as the tax regime around Dividends gets tightened up… and the smell around some forms of avoidance gets stronger… maybe it’s time to have a word with your accountant… and make sure your Dividend payment policy still suits you…?

 

Source Documents & Calculators

New Dividend Tax Regime

Cracking Tax Calculators to play with

Simple explanation of Pension & Divs for tax year April 2017 and how the company can make tax deductible contributions to your pension… even if your low Salary means you can’t

The picture with this post comes from Salary Versus Dividends & Other Tax Efficient Profit Extraction Strategies: Written by Nick Braun

Capital Allowances

Capital Allowances… have you any waiting to be claimed?

If you’ve spent money on assets you have the right to Capital Allowances… which help reduce your tax bill… but are you claiming all that you can?

Sometimes keeping up with all the rules & wrinkles can be a tad too much for smaller accountancy practices… particularly the rules related to property…

e.g. did you know you can claim capital allowances for fixtures & features on buy to let properties?… without invoices for the work done?

There are specialist tax firms who’ll take a look at an Owner Managed Businesses assets to figure out :

1. if there are claims to be made… and

2. if claims are being made are they being maximised

And they bill on a no-gain-no-pain basis… so what have you got to lose?

Here’s a firm who’ve had a lot of success maximising Capital Allowance claims… Leeds Based

The C3 Group .  and here’s a flier introducing you to Peffs

Permanently Embedded Fixtures & Features (PEFFs) may be claimed on most types of commercial property, from retail or industrial units to offices and factories, to bars, hotels and restaurants. They can also be claimed on more specialised commercial properties such as nursing homes, doctor or dentists surgeries, sport centres and even data storage centres. PEFFs can also be claimed on residential buy to let properties that are let to more than one unrelated persons such as student accommodation.

Why not check it out & claim all the Capital Allowances you can?

patent box

Patently obvious… open the box & take the money

The Patent Box means the tax rate on profits made from patents is to drop to just 10%…

This is a cracking way to encourage firms to patent their Intellectual Property (IP), and exploit it from here in the UK.

Any profits derived from exploiting a patent you own will be taxed in future at 10%… and not the current 20%

Patents can cost as little as a few grand to file… so should easily pay for themselves… because you get up to 20 years of paying tax at the reduced rate

So why not take a look at your IP… and take a look at Patenting some of it  ?
 I’ll admit that in the past I’ve been luke-warm on patents… the effort & costs just didn’t seem worth it for smaller Owner Managed Businesses given the limited commercial benefits.

The patent gives you protection… and that could boost your business’ value… and make new external funders a little more comfortable investing/dealing with you…but…

Read more

R&D Tax Credits… they want YOU to claim them

… and you don’t need a white coat… or an R&D department

Research & Development tax credits are the Government’s way of encouraging companies to develop new products and services…

Any company that spends money trying to improve a product or service or even a process through a technological advance where there’s doubt about the project’s success is likely to be eligible.

Is that you?

There’s a real good chance it is, and frankly HMRC are desperate for SMEs like you to claim the tax relief, regardless of the sector you operate in.


Some research suggests the largest number of claimants are in construction, and not high tech companies as you might expect.

I personally know of landscape gardners, web companies and very small manufacturers who have been successful in getting actual cash back from the tax man… and they did it all themselves.

How’s it work?

If you’ve spent money on R&D costs such as wages, raw materials & software then you can deduct up to 225% of these costs from your taxable profits. You can go back up to 3 years, and if that means you’ve overpaid tax then HMRC will send you a cheque.

And they send that cheque real quick.

Who does the claiming
Your accountant should be able to do it for you… but often they won’t, and frankly some don’t know how.

‘It’s not for companies in your sector’
‘It’ll mean masses more paperwork’
‘You have to produce a huge technical report.’
‘It will probably spark a tax investigation from HMRC’

Just some of the things accountants have told companies I know… so I told those companies to call HMRC directly and do it themselves… and they were all successful in getting the reliefs… without their accountant’s help… or fees.

A word on consultants & what will they cost?

There are some very good ‘no gain, no pain’ consultancy firms who will help you claim the tax relief. That means no payment unless they get you some tax money back.

Personally I know Terry Toms at RandDtax.co.uk… and they do a great job… taking 18% of the money recovered

There are others (eg Jumpstart ) and terms differ so it’s worth checking just what you’ll be paying out if successful (& for how long… I’ve heard of one that takes a cut for the next 4 years too… which is a touch too generous!)

Your first Claim

Have a poke around the HMRC website. See if you roughly match the basic criteria. Then give them a call. They really are very friendly and helpful … at least when it comes to R&D tax reliefs!

HMRC’s eligibility criteria can look daunting (there are links below)… but it’s not

Try asking yourself these questions :

Technology : Does my company attempt to develop new technology, with no guarantee of success?

Improvement : Does my company try to make objective, measurable, and significant improvements to the design and implementation of its products, services or processes?

Problem solving  : Does my company use appropriately qualified or experienced internal staff to solve a challenging technical problem (although you can use sub-contractor for parts of the project)?


Here’s the way HMRC frame those questions… this is an email from an HMRC R&D tax relief officer…
1 What is the scientific or technological advance?
Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken.
Science does not include work in the arts, humanities and social sciences (including economics).
It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
2 What were the scientific or technological uncertainties involved in the project?
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems are not likely to be technological uncertainties.
You should set out at a high level, in a form understandable to the non-expert, what these uncertainties were and when they started and ended.
3 How and when were the uncertainties actually overcome?
Describe the methods adopted to overcome the uncertainties and the investigations and analysis undertaken. This should not be in great detail, simply sufficient to show that the matter was not straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties were not overcome, explain what happened.
4 Why was the knowledge being sought not readily deducible by a competent professional?
It might be publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that precisely how it was done is not in the public domain. In either case a valid technological uncertainty can still exist.
Alternatively, if the project is one where there is little public information available, you’ll need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
Whichever is appropriate set out the details and have evidence available if needed.