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Helping a business owner build a tax-efficient exit strategy

Our client, a Director of a successful small business was referred to Golden Oak Wealth Management by their accountant. They recognised that the company had good cashflow and profits, but had surplus cash in the business, as well as a large Corporation Tax bill each year.

Background

The client, 48, had spent many years building up their business to a level that was giving them good levels of income and a good standard of living. They were paying themself a combination of salary and dividends up to the higher rate tax band to be tax efficient, on advice from their accountant. However, the profits in the business were continuing to build up, resulting in large cash holdings and a large Corporation Tax bill each year. Their plan was to build up the business to a level where it could potentially be sold or passed on to their son, at around the age of 60-62.

The client had previously paid a small amount into a pension each month but did not really engage with this in any way. They also had life cover to protect to their outstanding relatively large mortgage liability, which they paid for personally. They did not have any other financial planning in place. Outside of the business, the client had a spouse who was dependent on them, as well as 2 teenage children.

Key Needs

The client’s primary objective was to extract money tax efficiently from the business, as well as starting to build more structure with their financial planning. They had cash in the business that was surplus to requirements, and good cashflow expected to continue for many years. They wanted to maintain their salary and dividends at the same level to avoid paying higher rates of tax, and this was sufficient for their requirements. They also wanted to make sure that they could protect their family should something happen to them.

Our Solution

We recommended our client make the maximum pension contribution allowable, including utilising their pension allowances from the previous 3 tax years via carry-forward. This was approved by their accountant as a Corporation Tax deductible expense in that year’s accounts and satisfied the ‘wholly and exclusively’ rules. This allowed them to extract a large proportion of the company cash reserves tax efficiently in their own name, alongside their salary and dividends, and bolstered their pension pot. We also recommended ongoing contributions from the company, to utilise their full pension allowance each tax year moving forward. As well as saving Corporation Tax and making the company’s cash work harder for them, this helped to start to build their exit strategy of retirement in future, and helped the client become more involved with their retirement planning.

We ran various tax strategies and cashflow forecasts, giving them an indication of what their retirement provision looked like.

Alongside this, we reviewed the client’s existing protection provision, and recommended they take out ‘Relevant Life’ cover. This is an employee benefit life cover policy, paid for by the business and is also a Corporation Tax deductible expense. This would provide their family a higher level of protection, to cover the mortgage liability as well as a surplus to maintain their standard of living for a period of time. The client was able to cancel their existing personal life cover policy, saving them money each month from their personal outgoings.

We also discussed their business continuity, should something happen to them. This resulted in a further recommendation for Income Protection, to cover their income if they were incapacitated and to lessen their reliance on their business should they be unable to work. This policy covers a large proportion of their earnings should they become incapacitated, and the cover will continue until their likely retirement age.

Following our recommendations, the client became much more engaged with their financial planning, which gave them more focus on their business and family, and it helped them to understand their future tax strategy. They no longer look at their pension as something in the background, but understands its role in his financial planning, as a tax efficient vehicle to extract money from the business. They also have the safety of knowing that their family would be provided for should they pass away, and that their income is protected should they become incapacitated.

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