Tax Tips For Entrepreneurs
Entrepreneurs relief: Often an entrepreneur will be considering their exit from a business and the secure capital gains tax treatment on the sale of their business or trading company. It is important to know what qualifies for the relief and how a company may become a non-qualifying company. It is not generally wise to hold too many investments (if any) in a company since this may change the company from a trading to an investment company. Too much cash can be an investment. It may also be worth planning the exit well in advance and keeping in touch with your tax adviser may prove very useful.
Research & Development Relief: Broadly, a company can claim an additional 130% tax deduction on qualifying R&D expenses. The definition of research and development is wide and can apply to almost any business. The expenses must be incurred on a project that seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. Whilst the definition might be frightening to read and understand, expenses of an R&D nature are incurred by a vast amount of businesses which many do not realise. You could therefore be eligible for enhanced tax deduction.
Capital Allowances: A business may claim capital allowances in respect of plant and machinery, fixtures and fittings and cars. Capital allowances reduce taxable profits and some by up to 100%.
Until 1 April (5 April 2021 for income tax) a low or zero emission car can qualify for a 100% first year allowance if its CO2 emissions do not exceed 50g/km and the car is purchased new and unused. A similar 100% FYA applies for zero emission vans, where the vehicle is purchased new and unused before 1 April 2021, or 5 April 2021 for income tax.
There is also great potential to maximise the capital allowance position, particularly in the case of property purchases, refurbishments and developments.
Pension contributions: Maximising pension contributions is an excellent tax deferral and saving mechanism. Nowadays pensions are more flexible, and an individual can draw the entire pot out should they wish but subject to tax. Certain types of pensions can lend to the company, buy commercial premises etc. Pensions can also help with estate planning. Pension contributions are tax efficient for both employers and employees.
Enterprise Management Incentive: An EMI is a share scheme designed for an SME to retain and incentivise talented employees.
Raising finance: The Enterprise Investment Scheme is designed to help small trading companies raise finance. EIS offers tax reliefs to investors who purchase new shares in those companies. Subject to specific conditions being met there are both income tax and capital gains tax reliefs.
The Seed Enterprise Investment Scheme offers more generous reliefs to individuals investing in smaller, potentially risky early stage companies. In addition to a 50% income tax reduction, there is also a 50% exemption from CGT for gains realised on any asset, where the gains are invested in SEIS.
Tax Tips For Individuals
Married couples: Married couples could transfer income generating assets to best utilise their respective tax-free personal allowances and income tax bands. An election may be made to enable a married couple to be assessed on the income arising from jointly held property in accordance with their actual beneficial interest rather that taxed upon them equally.
Transfers of assets between married couples are exempt from capital gains tax. If there is a potential capital gain it may be appropriate to transfer the asset or interest therein to a spouse, relieving capital losses or utilising the annual exemption. Owning business assets between spouses where it is expected to sell at a significant gain may also be efficient for entrepreneurs’ relief.
Additional rate of income tax: Personal pension contributions and gift aid donations can reduce the amount of income tax high earners pay at the additional rate of 45%.
Personal allowance: Individuals with a statutory total income in excess of £100K could look to make personal pension contributions in order to preserve their personal allowance. Salary sacrifices in exchange for tax efficient company benefits may also be effective for these purposes.
Tax efficient investments: Investments into Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes attract tax relief. Also when those investments are realised within the rules, the gains may be tax free. One strategy may be to invest annually with the intention of realising annually after three or five years. Capital gains tax deferral relief/exemption may also apply when investing.