Although we should not belittle the significant damage to the economy and individual personal situations, there are also opportunities to review and protect your business arising from the current situation. This article briefly considers a few ideas which might be relevant depending on your circumstances.
The current low value of businesses may mean that share options are under water (the exercise price is higher than the current market value of the shares). In this situation it may be worth re-issuing options at the current low value. Equally this may be exactly the time to issue new share options to capture the current low values.
There is an opportunity to review your business and potentially introduce a personal or family investment company into a business structure may be easier at the moment with low share values. An investment company can be used as a low tax vehicle for accumulating surplus income from an incorporated business where the shareholders are unconnected and therefore don’t want their wealth retained in the trading company. It also provides a vehicle for redirecting income and wealth to other family members whilst retaining control, without creating a reservation of benefit. They can also be a useful and more tax efficient alternative to a discretionary trust.
R&D Tax Credits
HMRC has said it is doing its best to continue to process R&D tax credit claims during the pandemic. Research & development costs are incurred far more frequently than most businesses imagine and potential claims are often overlooked. Research & development tax relief may be available for your business if you carry on projects that seek to achieve advancement in science or technology and could be a fantastic way to reduce your tax liability and bring cash back in to the business in the form of a tax refund.
Inheritance Tax planning
With asset values low at the moment it is a good opportunity to review your business and consider whether this is the time to move assets to the next generation or into trust to minimise future exposure to Inheritance Tax.
The current crisis has highlighted the financial risk associated with trading businesses. There is an opportunity to review your business and consider a simple group structure which can segregate valuable assets from the inherent trade risk without undue complexity. Classically a holding company is inserted above a trading company which can be achieved without any adverse tax implications.
Business protection is always something to think about. Many business owners are potentially vulnerable should death or serious illness cause a major change to their business situation. This unpalatable possibility is something that all too often gets overlooked; it’s uncomfortable considering your own morbidity or mortality.
The ongoing Covid-19 pandemic, where every day, death rates from the disease are all over the media, causes people to place renewed priority to ensure the appropriate protection is in place to provide for both their business and their families. The most valuable asset to most businesses are its people, without them, a company’s survival can be at serious risk.
Where death or illness occurs, major disruption can follow, causing potential management disputes and financial pressure on the business. If a shareholding director dies, the surviving directors may have to accept someone from the deceased‘s family, taking a decision-making role in the business. It’s easy to see how that could become an intolerable situation. Also, where the deceased director’s earning power was instrumental in the success of the business, surviving the reduction in income and finding the money to recruit a suitable replacement – will take significant capital resources that many businesses won’t have available.
Many medium-sized enterprises might not be able to survive these challenges, making the protection of the business an absolute priority. Solutions are readily available to enable directors to buy out the deceased director’s shares and provide funding to replace the lost expertise. Many directors assume that the cost of this protection will be prohibitive – but in many instances, it’s available for significantly less outlay than they assume.
A range of business protection options exist including Key Person Cover, Share & Partnership Protection and Relevant Life Cover.
- Key Person Cover is life insurance (that could also include critical illness cover) taken out by a business on the life of someone deemed crucial to the business. It provides a financial safety net if a key member of staff dies or is diagnosed with a serious illness (if critical illness cover is included). The proceeds from the policy are paid directly to the company or partners, helping them to protect their profits or clear business debt to continue trading as normally as possible.
- Share Protection and Partnership Protection can help business owners keep control of their company if one of them dies or is diagnosed with a critical illness; it also ensures the deceased’s family are fairly treated.
- Relevant Life Cover (RLC) allows employers to offer a death-in-service benefit to their employees. It’s a tax-efficient life insurance policy, set up by the employer and pays out a tax-free lump sum on the death (or diagnosis of a terminal illness) of the person insured. The proceeds go to the employee’s family or financial dependants. This cover might benefit high earning employees who might exceed their personal pension lifetime allowance or have members of group schemes who want to top up their benefits.
Whatever changes you might be considering it is important that the arrangements are considered carefully to ensure there are no unexpected or adverse effects. If you would like to discuss your plans in more detail please speak to your usual contact at Albert Goodman.
Author: Michael Cahill, Albert Goodman