Most successful business owners have a professional dream team: their Accountant, Financial Planner and Lawyer.  With overlapping specialisms, these experts can collaborate when needed, to give considered advice tailored to the business needs.  That includes advice about tax, protecting the business and expansion for example.

As Financial Planners, our focus is usually on these areas for business owners:

  • Managing cash reserves to boost interest rates
  • Investing cash within the business into a managed portfolio
  • Preserving inheritance tax reliefs for shareholders on death
  • Tax planning for owners to minimise income tax when extracting profits
  • Protecting the business from the impact of a key person dying or being incapacitated
  • Exit planning for owners and advice about how to manage the proceeds

Cash management

Having a good level of cash reserves is vital, to act as a buffer in lean times.  As the bank balance builds up, it can support larger dividends, or act as a ‘war chest’ for future expansion.  But holding too much cash can actually put a business at additional risk.

Risk of bank failure: If a bank providing your business accounts fails, the cash balance over the FSCS protection limit is at risk. There are some easy ways to manage this and protect the bank balances.

Missing out on interest: Most business bank accounts offer no (or low) interest on deposits. For example, a business account might pay 0.25% when it’s possible to receive 4%. If your business had £250,000 on deposit, that’s £625 of interest compared to £10,000.

Risk of future claims: In some businesses there are risks of future claims which could decimate your cash reserves or even lead to company failure. This can be managed to protect some of the business assets if the worst were to happen.

Inheritance tax on the business value: Special business tax reliefs normally protect the value of trading businesses from inheritance tax (40%) on death, meaning shares can be left to your family without inheritance tax being due. However, holding a lot of cash or other investments within the main business can put this relief at risk, because the business may no longer be classed as being wholly a trading company.

How we can help

  • We can put in place a cash management platform that allows several business savings accounts to be opened simultaneously with one simple application process.
  • Large balances can be easily spread across multiple bank accounts, obtain the best interest rates and remain within the FSCS limits. There are varying levels of accessibility (from instant access to 5-year fixed rates) to align with what the business needs. With all accounts visible on an online dashboard this is a simple and effective solution.
  • We can work with your accountant to create a Holding Company and move some of the surplus cash or assets held in your trading business into that new company. This helps preserve the valuable inheritance tax reliefs, and protect the assets from future claims.

Investing in a Holding Company

A proportion of the cash moved into the Holding Company may be placed in a bank account or on a Cash Management Platform to get the best interest possible. The remaining cash is commonly invested into a managed portfolio of equities and bonds. For some business owners, buying property is also appealing. Either way, the purpose is to enjoy growth on that cash greater than could be possible by leaving it in the bank.

Savings interest and rent is taxable as business income, but dividends earned from an investment portfolio are typically tax free. Capital gains are typically only taxable when they are realised by part of the investment portfolio being sold during the accounting period. This makes the investment portfolio option reasonably flexible and tax efficient.

How we can help

  • We can recommend a suitable portfolio and provide ongoing management. We may consider our range of  Core and Good Practice in-house investment portfolios
  • Any portfolio would remain accessible and can provide an additional revenue stream if needed. The aim is for it to work for the long-term benefit of your business, and target growth in excess of inflation and the interest paid on cash.

Inheritance tax and leaving a legacy

For many company owners, their business is their livelihood, their pension and their legacy.

Inheritance tax on death: Business tax reliefs protect most trading companies from inheritance tax when the owner passes away, meaning shares can be left to your family without inheritance tax of up to 40% being due. This relief can be very valuable. Not only is your family better off as a result because there’s no tax to pay on that part of their inheritance, but it also means the trading business is safe to continue under their ownership without having to be sold to pay the inheritance tax bill.

As mentioned above, holding a lot of cash or other investments within the trading business can put this relief at risk, because the business may no longer be classed as being wholly a trading company. A common reason for setting up a holding company is therefore to keep the profits from your trading business distinct from the income or capital gains you might be earning on the business savings or investment portfolios. This helps protect your inheritance tax business relief.

Family Investment Company: If a holding company is set up, it is common for this to develop into a Family Investment Company in time. This is a great way to gradually transfer the ownership to children or grandchildren, so they benefit from the capital and income it generates. As the original business owner, you gradually lose access to the capital, but crucially you can retain control over how it’s used and it can be partly/wholly protected from inheritance tax when you pass away.

How we can help

Setting up a Holding Company and transforming it into a Family Investment Company is a complex area of long-term legacy planning. This requires collaboration between your professional advisers.

  • We can work closely with your accountant and lawyer to establish whether this would be valuable as part of your personal financial plan.
  • With the Holding Company in place, we can recommend suitable investment portfolios within it.
  • We can provide regular reviews of the long-term plan for the company and your legacy.

Tax planning for owners 

Minimising tax is often a priority for successful business owners, both within the business and personally.

Within the business there is corporation tax to pay on profits, so a key strategy is how to reduce those profits. A simple step is to make pension contributions which are treated as a business expense, so reduce the profits and the tax due.

Personally, there is income tax to pay on drawings, including salary and dividends (20% – 45% in England & Wales). With income tax rates getting particularly high when earnings are over £100,000 a key strategy is often to restructure earnings so they’re less than that limit, or otherwise to use tax-incentivised investments to claim 30% – 50% of the tax back.

Business owners may pay need to pay capital gains tax (10% – 20%) when a business (or other investments) are sold at a profit. Business Asset Disposal Relief (previously called Entrepreneurs Relief) can secure the first £1m of capital gains at the lower 10% tax rate, but conditions apply.

Inheritance tax can apply (40%) when a business owner passes away, if the business does not qualify for inheritance tax Business Relief or Agricultural Relief. With tax at that level, it’s really important to make sure your business is eligible for one of those reliefs where possible.

How we can help

We can give advice about how to minimise all types of tax related to your business, while working closely with your accountant. Advice can typically include:

  • Making pension contributions from the business and catching up from earlier years when contributions were missed.
  • Investing the dividends or salary you receive into tax-incentivised investments which offer 30% – 50% up-front tax relief.
  • Advice about protecting the business and your personal wealth from capital gains tax where possible including you are eligible for valuable Business Asset Disposal Relief (Entrepreneurs Relief).
  • Advice about how to minimise or plan for inheritance tax, including ensuring your business would be eligible for valuable Business Relief (or Agricultural Relief) on your death.

Insurance to protect against the impact of death or serious illness

There are often two scenarios to plan for if a business owner passes away: how to ensure continued business success without them and how to enable the other shareholders (or management team) to buy their shares for an appropriate price.

Insuring key people for the business: Businesses are often reliant on a group of key people to guarantee continued success. A business founder might be the ‘face’ of the company. A Sales Director may be the main source of new customers or sales, for example. The death of any key people like this can be a disaster for a business. Sales can drop, customers and team members may leave. To give the business the best chance of success we recommend Key Person Insurance which pays out a lump sum if a key person dies or has a serious illness. While complex to arrange, it need not be expensive and can be a great way of mitigating that risk.

Insuring shareholders: If a business owner dies, the other shareholders will typically want to buy those shares from their estate. But if the shares are of substantial value, that can be impossible, leaving the business owner’s estate (or spouse/partner) to try and sell them (and potentially the whole business) to a third party.

To ease this situation, we recommend Shareholder Protection Insurance which pays out a lump sum designed to be enough to pay for the business owner’s shares. This leaves their estate with cash instead, and the business can swiftly continue under new ownership. This can be complex to arrange but it need not be expensive and is really essential for any business with multiple owners. Your financial planner and lawyer need to work closely together throughout.

Insuring key people personally: If a key person in your business passes away or is unable to work through illness for a period of time, it’s a great idea to have insurance in place that will pay out a lump sum or income to their family (on death) or to the person themselves (if they are ill). With premiums usually paid by the business, this is a valuable benefit for the owners, key people and their families.

How we can help

Our expertise can help protect you from the unexpected.

  • We can recommend the most appropriate type of insurance for the business’s shareholders and most important people.
  • This includes Key Person Insurance, Shareholder Protection Insurance, Critical Illness Insurance, Executive Income Protection and Health Insurance.
  • We’ll obtain the lowest cost insurance in the market, take care of the application for you from start to finish and arrange for the insurance to be put into an appropriate type of trust.

Exit planning

Selling a business is one of the most difficult things an owner can do. The process requires strong collaboration between all of your professional advisers, with your accountant and lawyer leading the sale, and your financial planner taking the reins after completion, recommending how the proceeds are used or invested, and creating an income strategy so you can continue to live comfortably into your retirement or as you move into another venture.

For more information about exit planning, please see our dedicated page about selling a business.