Tax for life – what milestones should trigger tax planning?

When you’re a business owner or entrepreneur, you tend to put a lot of thought into the structure and planning of your business. But there can often be a lot less focus on structure and tax planning when it comes to your own personal wealth.

If you want to plan effectively for the big financial and life milestones, your personal tax planning and wealth structuring needs to be as granular, forward-thinking and organised as the planning you carry out for your business empire.

Bilal Mahmood, explores the milestones and times in your life that should trigger tax planning.

Milestones and the need for a plan

Setting up your own company can be a complex and time-consuming venture. But in my experience, there’s a real need to look beyond the business to consider some of the key life milestones from the perspective of your own personal wealth and taxes.

When starting out as an entrepreneur, it can be difficult to put the whole business and personal finance side into perspective. Many people in this situation don’t have a plan for big life events – things like buying a house, getting married, or having children. But in terms of these life milestones, there’s some real value in pinning down your key personal and family goals, and planning accordingly.

Getting a foot on the property ladder

For young entrepreneurs, getting on the property ladder is likely to be a key life goal. But with property prices high, this can be a challenge.

Most people will need at least a £30,000 deposit to get a mortgage and become a homeowner – and that’s a sizable chunk of cash when you’re still trying to establish your new business. There are initiatives out there to help aspiring property owners. For example

• Help to Buy: Shared Ownership scheme – this allows you to buy between 25% and 75% of a property and then pay rent on the remaining share.
• Help to Buy ISA – this is an ISA account for first-time buyers where the Government will contribute 25% to your deposit, up to a maximum amount of £3,000 funding.

Many young people think they can save up a deposit in a year but, in reality, you’re probably looking at a three-year plan if you’re wanting to buy a house in the current climate.

The Help to Buy ISA is certainly something to look at – it’s free money, in a sense. With a 25% government contribution, you should be going for it!

Marriage, family and business structure

When it comes to setting up and running a business, you should always plan early – that’s something I always stress with the business owners we work with. If you’re thinking of having children and starting a family, then choosing the best structure for the business is incredibly important.

Many business owners will start out as a sole trader, or as a partner in a small partnership. But as your business becomes more established, it may be sensible to incorporate as a limited company – with all the potential benefits that will bring you. If you’re starting out initially, you should always have your mind on the company structure, and there are a few different things to think about here when it comes to your life milestones. Some key questions to ask yourself will include:

• How should I structure the shares in the company?
• Where do I see the business going in the next five to ten years?
• Will my spouse or partner be involved in the business?
• Should my spouse/partner have shares in the company?
• Will my children be involved in the business?
• Do I want to eventually hand the business over to my children?
• What will happen to the business when I die?

These are all important scenarios to think about, right from the start. If the business is in a normal trading scenario, there are also a number of tax reliefs that you need to consider. Two of the important reliefs to look at banking will be:

• Entrepreneurs’ relief (ER) – this allows you to reduce your Capital Gains Tax to 10% when you sell all or part of your business in the future.
• Business property relief (BPR) – for estate-planning purposes, this gives you relief from Inheritance Tax (IHT) on the transfer of business assets including shares at a rate of 50% or 100%.

Think about these reliefs from the outset, get the overall business and investment structure right and think about where you can plan effectively. 

Having children and looking to the future

It pays to think ahead and factor your family plans into everything. Thinking about the future financial needs of your children may not be foremost in your mind in the early days.

But this is where good tax planning and a good advisor really do add value. You should always be thinking ahead and formulating a family wealth plan as early as possible. We can help you look forward, consider the right questions and create a business and investment structure that looks after the long-term financial security of your children.

Managing your surplus cash

As your business expands, and you become more successful, it is likely that you’ll have accumulated some cash in the business. What do you do with that money? Many owner-managers will want to hold on to this surplus cash – but this can potentially cause problems.

By accumulating large amounts of surplus cash within your trading company, you can potentially jeopardise your access to reliefs like entrepreneurs’ relief and business property relief.

You need to consider these potential effects as you go along, and avoid retaining large amounts of cash surplus to working capital requirements in your company if that will potentially have a negative tax impact on a future sale of the company shares for example.

Family investment companies (FICs)

Sitting on a big pot of cash, but without knowing how to invest it tax efficiently, can be a common issue for many profitable business. In this kind of scenario, it’s worth looking at a ‘family investment company’.

FICs became a popular alternative to trusts following the changes to trusts legislation back in 2006. A FIC is a very tax efficient vehicle for accumulating wealth. It can primarily be an estate and wealth planning tool but may also be structured to provide income tax savings in certain scenarios.

Trusts are still important in tax planning, and can also be used in conjunction with FICs to pass down wealth through the generations and provide for those milestones such as university fees or that first step on the property ladder.

Having a good advisor on hand

Whatever structure and plan you choose; there can be some quite complex tax issues to think about. Talking to your advisor about your business and personal goals for the future is the starting point for getting your life plan in order. Knowing your goals from the outset is critical, so if you’re aiming to retire at 50 and intend to hand the business to your children, that’s something to share with your advisor and plan around. We can help you plan for those important milestones and get the best from life and your business. Our tax advisors work with you to:

• Think through your future plans for investment, retirement, inheritance and succession planning
• Put the right business structures and investment vehicles in place
• Review, update and revise your plan as your children and family grow and as your circumstances change.

Talk to one of our North London Tax Advisors about getting your tax planning in shape.