A high growth business

After making a profit the next target is growth, to be a “high growth business” is a goal for many entrepreneurs. Running a business that makes a profit is an achievement, growing that profit year on year is fantastic. But with this comes the next set of considerations and planning requirements;

What do I do with the excess capital?

How to I take more out of the business without paying lots of tax?

How do I make sure my staff stay and I continue to attract more?

I have always been an advocate of people de-risking their personal positions. If an individual has separate assets/investments that are not linked to their business it gives them piece of mind and the ability to direct 100% of their focus to their business which is their primary goal. Extracting excess capital in a tax efficient manner, and then using this capital to build portfolios that can grow independently from their business achieves this goal.

At this point the company should have a good quality pro-active accountant who will provide advice on the combination of salary and dividend and the company’s scope to pay pension contributions. They then need to decide what to do with capital; cash reserves should have been built when the business began to make profits, so long term investment portfolios should be the next step. The tax efficient ISA allowance has now been increased to £20,000 p.a. so beginning to build ISA portfolios should be an initial and annual target.

The pensions that were started a few years ago when the business made profit can now be more fully funded using carry forward allowances and annual contributions allowance. Contributions into pensions can be made directly from the company gross and are considered a business expense so will result in a reduction in the corporation tax bill. Advice is essential here as the calculations for how much can be paid into a pension in any one year depend on a number of factors and the calculation is anything but simple – especially as the contributions get larger. A strategy here may be to plan potential contributions over the next few years in order to maximize funding scope and tax relief.

For those that don’t want to take too much out of the business (or don’t require it) then there is the option to invest on balance sheet. It is important that invested capital is not required for anything in the business and that this can be sure to be the case for at least 5 years if equity investment is considered. There are a number of other considerations here and advice would be essential but it is a viable option for those wishing to grow their excess cash within the business.

The driving force behind most businesses are the staff. Most companies will be in the midst of auto-enrolment now, but viewing the pension scheme as an attractive benefit and providing increased levels of contributions in excess of the minimums is a good way of rewarding staff and attracting new ones. Other considerations could be given to setting up Death in Service Schemes, group private medical cover (can include families) and even income protection. These can all be relatively inexpensive ways of putting together a really attractive benefits package for employees.

These are just a few of the things to consider when a business gets to the “high growth” position they aspire to. There are many other things to consider and everyone’s individual position and business will be different so there’s no one size fits all approach. What is important at this stage is to begin to formulate a plan with your adviser for you and your business.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Any reference to taxation will be based on your individual circumstances and subject to change.

A young business that is beginning to make some profits

At this time the owner(s) are likely to be working very hard and fully focused on continuing to drive the business forward. They have already accomplished the toughest thing, making a profit! they now want to push on and grow. For this they will have a business plan and perhaps a mentor to help them put that plan in place. If the business has a plan then so should the business owner, for themselves and their families.

Entrepreneurs tend to be very driven individuals, goal oriented and focused on the task at hand. They though, like all of us have worries, what ifs?

What if something happens to me and I can’t work?

What if the business goes through a tough time?

What about the mortgage, the school fees, other debts?

But, what if these worries can be taken care of? This would give the individual more time to focus on their main objective – growing their business.

At this stage the first thing on the list should be protection; for them, their family and their business. A relatively small outlay life cover should provide enough capital to cover all debts (including mortgages). Thought should be given to protection of income and also in the event of a critical illness. Protection for the business too; if something happened to you would someone you trust step in to run it, or potentially sell to generate capital?

What about personal exposure to the business? Reducing debt elsewhere and building cash reserves/investments that are separate gives peace of mind. This is hugely important and allows the individual to focus on their company.

For those with more scope thought should be given to the longer term – by setting up a pension now even if minimal amounts are contributed this effectively stores up unused pension allowances for the future. For high earners (those earning over £150,000) the pension contribution allowance is gradually eroded down to just £10,000pa once they are earning over £210,000pa. The ability to take this level of income from their company will be most owners long term aim, but building up a tax efficient pension fund will also be a target. The new rules on pension contributions could prove problematic in the future but by starting a pension early it effectively starts the clock for carry forward contribution enabling lump sums to be made at a later date. This is because unused contributions can be carried forward for a period of 3 years on a rolling basis.

These three areas I believe should be the first planning an entrepreneur takes when he/she begins to make profits from their business. They are relatively small and inexpensive steps so shouldn’t hinder growth but should enable less worry and more time to focus on their company, which has to be a positive!

Residence Nil Rate Band

On 6^th April 2017, the Residence Nil Rate Band (RNRB) was introduced and is available to those who, on their death, leave their main residence to a direct descendent. Initially the RNRB will be £100,000 per individual, rising to £175,000 by the beginning of the 2020/21 tax year, potentially allowing married couples to pass £1m of their estate value to beneficiaries free of Inheritance Tax (IHT).

Increases in the RNRB

The RNRB will increase per individual as follows:

The RNRB will be offset against the value of the property before the standard Nil Rate Band.

Tapering

Estates over £2m will see their RNRB tapered by £1 for every £2 over the threshold, meaning that the RNRB is lost once an estate is over £2.2m (individual) or £2.4m (couple) applicable to the 2017/18 tax year. Estate values are based on all assets less liabilities immediately before the individuals death. The tapering of the RNRB is applied before any exemptions or reliefs, meaning that qualifying assets for Business Property Relief (BPR) and Agricultural Property Relief (APR) form part of the estate when determining and applying the taper. Any lifetime transfers made within 7 years of death are not included.

Qualifying descendants

The RNRB only applies to transfers made directly to children, grandchildren (and spouses thereof) and trusts, provided the beneficiaries are treated as owning the trust asset (therefore excludes discretionary trusts). Consequently, those without children are prevented from benefitting.

Provisions for downsizing / sales

Downsizing provisions may apply where an individual, on or after 8^th July 2015, has sold, given away or downsized to a less valuable property. In order to claim under this provision, some of the estate must be left to qualifying individuals and will be limited to the lesser of the amount of estate bequeathed or the value of the RNRB in the tax year of death.

Transfers on death

The RNRB is transferable between spouses and is also available when the first death occurred prior to its introduction. There is also no requirement for the first to die to have owned a qualifying residential interest at the time of their death.

This summary provides an overview of the Residence Nil Rate Band, if you think that your circumstances may need reviewing in light of its introduction, please contact us for further clarification or advice.