06 Aug 2024
From inception and growth to risk management, strategic investments, and exit planning, expert, independent advice can help to steer a business towards financial success. Martin Cotter, Managing Director of Lumin Wealth, explains more.
Typically small business owners consider four stages in the life cycle of a business: building wealth, extracting wealth, planning for retirement, and exiting the business.
It is crucial to maximise all available opportunities at the various stages, and ensure the business is well set up to meet your personal objectives.
Accumulating wealth (and protecting it)
During the accumulation stage, cashflow modelling can provide a clear view of your future cash flow, enabling you to easily visualise the growth plan for a business and the eventual exit strategy (sale/retirement). This can flag up other areas of opportunity, such as tax efficiency, and optimising retirement assets (eg. pensions/ISAs).
Another important area to be aware of is business protection. Would the business survive if a key member of staff was unable to work due to illness, or died unexpectedly? There are various forms of protection to ensure that a business can continue to thrive, even in the event of losing a key employee.
Extracting wealth and planning for retirement
Once a business is generating substantial cash profits, it’s important to extract profits in a tax efficient manner. Many directors take a small salary, and draw the rest via dividends.
But, with dividend tax rates currently high, pension contributions can be a key alternative strategy. Employer pension contributions can usually be offset against corporation tax, so making a pension contribution via the company, as opposed to a personal contribution, can result in significant tax savings.
A generous £60,000 annual allowance means large amounts can be paid into a pension in each tax year. Those with unused annual allowances from the previous three tax years may be able to contribute a larger sum.
Facilitating a tax-efficient exit
Business Asset Disposal Relief (BADR), which was previously known as Entrepreneur’s Relief, is one method that can facilitate a tax-efficient exit when company directors are looking to sell or retire.
BADR allows UK business owners to benefit from a reduced capital gains tax rate of 10% when disposing of qualifying business assets. Options where BADR can be applicable include selling to current employees via a management buyout, or merging with/being acquired by another business.
If younger family members are taking over then gifting the business – or your shares – is another option. After seven years these assets would be outside of your estate. If the company qualifies for Business Relief you may be able to pass it on without a tax charge.
Early planning can help you find the right exit solution.
The role of financial planning
Partnering up with a financial planner helps ensure your business/family are protected, and that you are maximising your wealth-building and tax-cutting opportunities. This latter point is especially important in light of recent cuts to the dividend allowance and an increase to the standard rate of corporation tax (from 19% to 25%).
Want to find out more about how financial planning can lead to better outcomes for your business? Call 03300 564 446, or get in touch via the contact form.
