1. Offer tax efficient share option schemes
Offering an HMRC approved share option scheme, for example the enterprise management incentive (EMI), can be a powerful motivator for employees. Specifically targeted at smaller companies, it enables company management to offer greater financial rewards, over and above any increase in salary levels.
As the EMI is approved by HMRC it offers a number of tax advantages which are not available using unapproved schemes or share issues. Advantages include agreeing the value of the shares with HMRC in advance; the fact that no tax liabilities need arise until the shares are sold; the availability of entrepreneurs’ relief 12 months after the options are granted; and no requirement for a minimum 5% shareholding.
Example – staff member earns a £50K basic salary plus a £20K bonus. His company introduces an EMI share option scheme and HMRC approves the value of each share at £10. The employee is granted an option to acquire 1,000 shares (1% of the company) at the initial agreed valuation price. Five years later the firm has enjoyed significant growth and an offer to sell is accepted at £100 per share. The employee exercises his option to buy 100 shares at £10 per share and immediately sells them for £100 per share, making an overall gain of £90,000. The employee can claim entrepreneurs’ relief and pay just 10% tax on the gain.
2. Claim maximum capital allowances
The annual investment allowance (AIA) was increased in April 2014 to £500,000, and the allowance is set to remain at this level until December 2015. Companies can therefore currently invest in new plant and machinery to the value of £500,000 and obtain tax relief for the entire cost in the year of purchase. The relief is allocated between group companies but can be allocated on the most beneficial basis.
The AIA may not always continue at this level – indeed it has been at much lower levels in the past, which meant that high level costs could only be written off against tax over many years. Therefore if your company needs to invest in plant and machinery, now may be the time to do it!
Separate from the AIA, you can in certain circumstances claim capital allowances for capital expenditure on building improvements and renovation. This may also apply to work that has been undertaken before you purchased the building and for which relief has not previously been claimed. This is frequently overlooked and a specialist will be able to identify any costs within a building for which relief can be claimed.
3. Manage inheritance tax (IHT) using business property relief (BPR)
BPR can reduce your IHT liability by reducing the chargeable value of business assets by as much as 100%. Following new restrictions introduced in 2013, BPR is a complex area and detailed tax planning is essential. The amount of tax relief available can vary significantly; this is easily overlooked and it is easy to incorrectly assume that all business assets will be fully exempt from IHT.
For example, 100% relief is given for an interest in a trading partnership, and 50% relief is given for property owned personally and used in the trade of your partnership. If the partnership owns the property however, 100% relief may be available.
Our advice is to undertake specialist planning in order to ensure your business assets are structured in order to maximise the reliefs available.
4. Ensure you and your employees can benefit from entrepreneurs’ relief
When a company is sold, it is possible for qualifying shareholders to pay capital gains tax (CGT) at the rate of 10% on the first £10 million of gains by claiming entrepreneurs’ relief (ER). This is a significant reduction in the standard rates of CGT which are currently 18% or 28%, depending on income levels.
Specific criteria must be met in order to be eligible for ER. As far as company shareholdings are concerned, broadly these are that you must be an officer or employee of the company; have a minimum holding of 5% of the company shares and voting rights; and the shares must have been held for a minimum period of 12 months prior to disposal. Whilst these criteria are often easily met by company owners, there are additional trading requirements for the company which can be overlooked. Planning ahead for a company sale is therefore essential to ensure that you don’t fall into traps for the unwary.
If minority shares are held by employees, often the 5% minimum shareholding requirement to qualify for ER is not met. If this is likely to be the case, granting employees share options under the enterprise management incentive (EMI) can mean they still qualify for the relief. Where shares are acquired through the EMI, the 5% minimum shareholding requirement does not apply and the 12 month shareholding requirement commences from the date on which the share option is granted, rather than when shares are acquired. These relaxations can make the acquisition of shares through an EMI share option extremely attractive for small minority shareholders.
5. Review company share structures to minimise future tax liability
If your company pays regular dividends, ensure that the necessary and correct paperwork is in place. This is important in the case of an HMRC enquiry, and it will also be important on a future sale of the company. Incorrect or missing paperwork can create additional tax liabilities and lead to reduced sale proceeds when you sell your company shares.
6. Use salary sacrifice schemes
Salary sacrifice enables employers to provide more value to their employees whilst generating financial savings either for the company or which can be shared with employees. Clarification and support is provided by HMRC for salary sacrifice.
The greatest savings are usually made when introducing salary sacrifice for company pension schemes, however it can be used for a variety of services such as canteen arrangements, childcare vouchers, cycles, bus passes,
For more information on tax planning ideas, please contact Lesley Stalker by emailing las@rjp.co.uk.