Family Business Update - October 2014

October 2014
Family Business
Update Seminar

www.francisclark.co.uk
Chairman’s Welcome
Ivan Burnard
Partner

Housekeeping

Winner ‘VAT Team of the Year’
at the National LexisNexis
Taxation Awards 2014

Programme
Ivan Burnard, Partner
• The long-term success of family businesses
Steve York, Tax Consultant
• Tax Planning for Growth
David Clifton, Chartered Financial Planner, Francis
Clark Financial Planning Ltd
• Pension Planning – Business Growth &
Succession

Family Business Update
October 2014
Ivan Burnard, Partner
The long-term
success of family
businesses

Introduction
• Ivan Burnard, partner Truro.
• The vast majority of our business clients in the South West are
family owned and run.
• Long term success, and succession, must be worked at.
• What can we learn from the long term success stories?

Contents
• What are the characteristics that make family businesses
different?
• The attributes of successful business.
• What a family business can bring to these characteristics.
• The really big picture; The Three Rules.
• How can we help?

Characteristics of a family business
Identify the structure
“Family circles”
Family
Business Ownership

Characteristics of a family business
The systems
• FAMILY
• Inclusive
• Birthright
• Relationship
• Permanent
• Emotional
• Memories
• Love
• A SOCIALISTIC system
• BUSINESS
• Selective
• Competence
• Contract
• Limited
• Rational
• Future
• Money
• A CAPITALISTIC system

The attributes of a successful business
• A clear strategy and vision.
• Knowledge of market position or niche.
• Effective sales and marketing machine.
• Organisation around systems, not people.
• Understanding how to recruit and motivate.
• Planned finances.
• “Manage” rather than “do”.
• Effective management structure.
• Succession “vision” – when and how.
• Open to external advice.
• Capitalistic language.

What the family can bring to the business
You start to see Socialistic language being used
• A clearly defined vision that the whole family can support.
• The family speaks with one voice.
• A separation of management and ownership (F-O-B). Have
defined roles (and responsibilities) for family, shareholders and
employees.
• Forward planning…… across generations.
• Inclusive…… takes time to understand family concerns and
individuals’ needs. Treats people with respect.
• Likes the family values as well as espouses them.

What the family brings
• Operates as a family partnership…… but
• Keeps family meetings outside the Boardroom…… and don’t hold
the Board Meeting at the kitchen table.
• Thinks about the family before business decisions are
implemented, but remains alert to conflicts of interest.
• Works to manage and resolve differences as they happen.
• Creates wealth for the wider family and raises the children to
understand the value of money.
• Gives the children freedom of choice.

What the family brings
• Understands the children's motivations in joining the family
business.
• Instils a sense of pride and belonging.
• Has high staff loyalty and low staff turnover.
• Considers appointing non-executive directors to bring
objectivity…… Mrs Jones sits at the Smith Limited Board table!!!
• Doesn’t forget the family members who aren’t involved in the
business (F-O-B).
• Works well together – and enjoys it!

Long term success
Reconciles the systems
• FAMILY
• Inclusive
• Birthright
• Relationship
• Permanent
• Emotional
• Memories
• Love
• A SOCIALISTIC system
• BUSINESS
• Selective
• Competence
• Contract
• Limited
• Rational
• Future
• Money
• A CAPITALISTIC system

Long term success?
“A family business is more than just a business. It opens
opportunities for developing a future vision based on family
tradition and the orientation towards values associated with
this tradition. Families plant trees, by creating things which
outlast their founders. Family business can and should serve
as lighthouses in society and pave the way in to the future”
Christiane Underberg, Underberg AG

The really big picture
The Three Rules
• How do some companies achieve exceptional performance over
the long term?
• Research of 25,000 companies over 45 years of operations by
Deloitte in USA – relevant beyond USA.
• What do they do differently?
• What makes them stand out?
• When faced with difficult decisions, what approach do they take?

The Three Rules
Rule 1 – BETTER BEFORE CHEAPER
They rarely compete on price.
Rule 2 – REVENUE BEFORE COST
Profits are driven through price and volume (growth), not thrift.
Rule 3 – THERE ARE NO OTHER RULES
Everything else is up for grabs, and will change anything to remain
true to the first two rules.

The Three Rules
• Can American management research be applied to family
business in the South West?
• Yes!
• Many of the “Miracle Workers” in the study are true family
businesses, and have been through (struggled through, in some
cases) generational change.
• When we look at our successful family businesses, we do see a
relationship to the Three Rules, even at the “smaller” end.
• Food for thought.
“The Three Rules” – thethreerules.com

How can we help?
• Financial modelling of the plan.
• The Family Business Growth Programme.
• Growth Accelerator.
• Succession planning – and the tax around it.
• A sounding board.

October 2014
Steve York, Tax Consultant
Tax Planning for
Growth

Tax Planning for Growth
• Tax rates for individuals on their own account
• What steps they might undertake as their “business grows”
• Incorporation - is it still appropriate?
• Extraction rates – salary, dividends and other ways…..
• Investment and Capital Allowances
• Raising funds in a tax efficient manner

Tax Rates for Individuals
Consider an individual setting up in business on their own
account….the self-employed tradesman e.g electrician…..
- Personal Allowance in 2014/15 - £10,000 – 0% Income Tax;
- Basic Rate Band - £31,865 – 20% Income Tax;
- Higher Rate 40%
- Income greater than £150,000 – 45% tax

Self-Employed Electrician
Self-employed also have to pay Class 2 National Insurance
- £2.75/week
Also have to pay Class 4 National Insurance
- First £7,956 of profits – 0%
- Profits £7,956 to £41,865 – 9%
- > £41,865 – 2%

Tax Rates on the Self-Employed
• As the business grows so tax rates increase…..
• When only starting up might not make a profit – no tax
• Increasing effective tax rates……9%, 29%,42%…..
• What can the sole trader do to avoid the higher rates?
• Might look to bring in another partner e.g. spouse
• Use the allowances of the spouse – both personal allowance and
basic rate band?
• What do you do when you have utilised both allowances?

Incorporation?
• Corporation Tax rates – 20% - much lower rates
• Opportunity to “crystallise goodwill” – pay tax at 10%....
• What do we mean when we say “crystallise goodwill”

Sale of Goodwill
Tim is a self-employed electrician. Paul decides to purchase his
business from him and pay him a market value of £30,000 for the
goodwill – the name, the customer list and the reputation.
This is a capital receipt – Tim pays £1,900 Capital Gains Tax on this
receipt.
But…take care with personal goodwill

Sell to own limited company
1. Limited company owes you £30,000 created at a cost of <10%
2. Can be withdrawn tax-free
3. If a “new business” then company can get tax-relief for the £30,000
over a period of time at a rate of 20%.

Corporate Tax Rates
With effect from 1 April 2015 – one single tax rate
- 20%
If looking to reinvest profits in business far better to be doing that in a
corporate environment – as only being taxed at 20% with 80% to
reinvest than suffering 42% (or greater) and having less to reinvest.
But what about the future??

Profit Extraction – Double Tax Hit
Profit in company – tax at 20%
A Limited
Salary
Dividends
Pensions

Profit Extraction – Salary vs Dividends
Salary Dividends
£ £
Available
Profit Pool 100,000 100,000
Bonus 87,873 Corporation Tax 20,000
Ers NIC (13.8%) 12,127 Profits available 80,000
for distribution
Gross Salary 87,873
Income Tax (40%) 35,149 Higher Rate Tax 20,000
National Insurance (2%) 1,757 on Dividend Income
Net Received 50,967 Net Received 60,000
Effective Tax Rate 49.03% Effective Tax Rate 40.00%

Profit Extraction – A new approach?
Profit Pool 100,000 100,000
Pension Contribution 100,000 Corporation Tax 20,000
Profits available 80,000
Tax Free Lump Sum 25,000 for distribution
Balance of Fund 75,000
Income Tax (40%) 30,000 Higher Rate Tax 20,000
Pension "Income" 45,000 on Dividend Income
Net Received 70,000 Net Received 60,000
Effective Tax Rate 30.00% Effective Tax Rate 40.00%

Profit Extraction - a new approach?
Points to consider:-
1. Age of recipient? Not great for a business owner in their 30s
2. Amount to contribute – remember the annual/lifetime limits
3. Complexity?
4. IHT position of fund

Capital Allowances – a reminder
Annual Investment Allowance – allows businesses to claim 100% tax
relief on qualifying expenditure up to the maximum amount.
The qualifying amount is currently £500,000 due to come to an end on
31 December 2015 – reducing then to £25,000

Reduction in Capital Allowances…..
A company has a 31 August 2016 year end. What annual investment
allowance can be claimed?
- 8/12 x £25,000 – £16,666
- 4/12 x £500,000 – £166,666
i.e in the year to 31 August 2016 the allowance available will be
capped at £183,333.
The amount that can be claimed in the later period is also restricted to
£16,666.

Starting Rate of Tax……
With effect from 6 April 2015 – for savings income
Starting rate of income
tax - £5,000 – 0%
Personal Allowance
£10,500

Raising Money Tax Efficiently?
• Borrow money from parents and grandparents
• Pay them interest on monies received
• Provided their income is in the “bands” above – no tax on the
recipient
• Tax deductible in the company

And what about the future?
- Sell the company?
- Gift Relief on the transfer of shares?
- Business Property Relief? Will it be available?
- Further use of allowances within the family?

October 2014
David Clifton, Chartered Financial Planner
Pension Planning –
Business Growth &
Succession

Agenda
• The new Pension Landscape from April 2015
• Case Study – a family pension scheme
o Purchasing the business premises
o Loan-back to the business
o Succession planning
• Summary
• Questions
www.fcfp.co.uk Twitter.com/francisclarkifa

The New Pension Landscape
from April 2015

Pensions in the media – pre-budget
Not always highly thought of…..

Pensions in the Media – post budget
• ……. Until now!!!

Pension reforms – Flexible Income
From April 2015 - Flexi-access Drawdown (FAD)
available
• Full access to pension funds from age 55
• No compulsion to purchase an annuity
• 25% of the fund still tax free
• Remainder of fund taxed at marginal rate when
drawn
• Existing drawdown pensions can be converted to
FAD

Pension reforms – Death Benefits
Beginning April 2015 - New Lump Sum Death Benefit
Tax Charges
• 55% tax rate scrapped
• If pension owner under 75 years old on death there
will be no tax charge on the fund – whether income
has previously been drawn or not.
• If death occurs when over 75 the remaining fund will
be payable to any chosen beneficiary at the
recipient’s marginal rate of income tax (from April 16)
• Reforms make pensions a far more attractive
savings vehicle

The current tax rules

Moving forward…

Case Study – Love Beer Ltd
The Company
• Founded 20 years ago by John and Sarah who are
now in their early sixties
• Their son and daughter-in-law Andrew and Rachael
have recently joined the business
• Started as a micro brewery but now expanding and
have won a contract with a major supermarket to
supply bottled beer to 500 of their stores

Issues to be considered
• Andrew and Rachael want to drive expansion plans
• Larger premises are required in order to fulfil the
new contract and have capacity for further growth
• Capital is needed to invest in a bottling plant

What to do?
• The family consulted their Accountants and Financial
Planners to help find a solution to their needs
• A family pension in the form of a Small Self
Administered Scheme (SSAS) proved to be the
answer
• They consolidated their individual pension assets
into one scheme with wide ranging benefits

One family
pension
scheme
£750,000
Existing
benefits
John
Sarah
£200,000
Andrew
£250,000
£200,000
Rachael
£100,000

Idea 1 Property Purchase
• The current premises are leased
• Larger premises needed to fulfil the new contract
• The family pension fund is used to purchase a larger
premises for £500,000 and Love Beer Ltd were
installed as Tenants with a rent of £40,000 per annum
• Family now have control over their premises and the
pension fund has a solid return from the rent

Idea 2 Capital to Fuel Growth
• £150,000 required to purchase a new bottling plant
• Rather than approach their bank the family took a loan
from the pension fund
• 5 year capital repayment basis at 1% above the
average base rate of leading UK banks. John & Sarah
used their home as loan security
• The pension has;
• funded growth
• gained a good investment (interest on the loan)

Idea 3 John and Sarah retiring
• Fast forward 5 years; John & Sarah now in their late
sixties want to retire
• The pension fund now consists of;

Original Contribution
John & Sarah
54%
Rachael
13%
Andrew
33%
£400,000
£100,000
£250,000

• Pension income
• Tax-free lump sum
Plus….
• they also consulted their Accountant to work out a tax
efficient method of reducing their shareholding
• Thus realising further capital from the business over time
• The business and the pension scheme continues to
thrive with Andrew and Rachael now at the helm

Summary
• The new rules for pensions make them much more
attractive to all
• They can form a critical role in the success of the
family business
• Company contributions made to the pension attract
corporation tax relief
• The pension fund can be an efficient method of
funding growth
Should you review your own pension planning?

Important Statement
No responsibility can be accepted for any action taken as a result of information contained in
this presentation. We therefore strongly recommend that no action should be taken before
obtaining detailed professional advice.
Past performance is not a guide to future returns and the value of investments and income from
them may go down as well as up and an investor may not get back the amount invested.
Francis Clark Financial Planning is a trading style for Francis Clark Financial Planning Limited,
which is authorised and regulated by the Financial Conduct Authority.
Registered Office: Sigma House, Oak View Close, Edginswell Park, Torquay, TQ2 7FF.
Registered in England No. 05413603
Exeter Plymouth Salisbury Taunton Tavistock Torquay Truro
This PowerPoint presentation is for general information only and is not intended to constitute professional advice.
Though Francis Clark Financial Planning Ltd is confident on its accuracy, no duty of care is assumed to any direct Recipient of this presentation and no liability is accepted for any
omission or inaccuracy.
www.fcfp.co.uk
Twitter.com/francisclarkifa

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(c) copyright Francis Clark LLP, 2014
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Family Business Update - October 2014

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