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Tax planning for family businesses: Is it GRRR or GAAR?
There has been a great deal of publicity over the last year or so regarding so called “aggressive tax avoidance” schemes involving high profile individuals and businesses. The General Anti-Abuse Rule (GAAR) that came into force on 17 July 2013 is one part of the Government’s approach to managing the risk of tax avoidance and has made many of the previously available “avoidance” schemes obsolete.
In my experience, the vast majority of family businesses have not historically participated in these more aggressive forms of tax planning and are therefore largely unaffected by GAAR. It is however important for family businesses to adopt a sound and commercial tax planning strategy to help the business remain competitive. Sound tax planning can also enable a cost effective succession route, helping to secure the longevity of the family business.
Like any business, family businesses should regularly review their structure to ensure it meets the commercial requirements of the business as well as being tax efficient. With large company corporation tax rates reducing, National Insurance rate increases and the introduction of a new top tax rate band in recent years, the tax consequences of choosing to operate as a sole trader, partnership, LLP, limited company or group of companies can be more significant than ever. Furthermore, how the profits are shared and the structure of family pay and profit extraction from companies between salaries, benefits, dividends and pension entitlements etc has an even larger impact on the overall tax cost. A tax efficient structure should benefit both the business and the family.
Pension planning can be an important aspect of succession planning, enabling incumbent generations to retire without an excessive on-going burden on the business. Pension performance and contributions require regular review, particularly with rules regarding contribution and fund limits having changed several times in recent years.
Succession plans should be subject to regular review as family’s plans and priorities will change over time, as will relevant tax legislation. With appropriate planning, Entrepreneurs Relief may be available to secure an effective 10% tax rate on payment to retiring family members for their shares. More flexibility regarding the amount, structure and timing of such payment may be available in a family business situation than would be the case in a traditional management buy-out scenario. This can help to reduce the financial impact and risk to the business.
Business Property Relief can be an extremely valuable relief for Inheritance Tax purposes when passing on business assets to the next generation. There are potential pitfalls and the position can change dramatically on a sale of the business and so needs to be kept under review.
Family businesses should not be shy about sensible tax planning – it is simply part of good governance, helping to secure the long term success of the business for the benefit of everyone connected to it.
The Lovewell Blake Family Business Club holds informal events throughout the year, for more information call Steven Scarlett on 01603 663300.