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Using the law to achieve your personal and professional objectives: Wealth planning and structuring


By Allard Bailey Family Law


In 2019 there were 5.82 million small businesses in the private sector, accounting for 99.9% of the UK’s business population. It therefore goes without saying that SMEs are an integral part of our society.

As an SME owner your business will be an integral part of your life and there will be a natural overlap between your business and personal affairs.  However, many entrepreneurs are so focussed on their business plans they forget to consider, or are simply unaware of, the impact their business decisions can have on their ability to achieve their lifetime goals. Just as importantly, many business owners are unaware of the affect their personal decisions can have on their business.

The most successful entrepreneurs take advice on the integration of their professional and personal goals and always have their eye on the ultimate prize. In our experience, it is the fact that many small business owners do not do this, that prevents them from achieving maximum growth – in both a business and personal capacity.

In this article we highlight four questions that all entrepreneurs should consider.  They can be relevant whether you own a business, a property portfolio or a series of investments from which you gain an income.

  1. Is your organisation structured effectively?

People become business owners for different reasons, some wish to create a family business and leave a legacy; others strive to make a social impact; there are innovators who want to change their industry or even the world; and others who simply prefer to be their own boss.

Your professional ambitions will usually pave the way in which you structure your business, but they should not be the only factors you consider.  As well as having a significant impact on how your business operates, its structure will affect how you take out funds, there will be different tax implications and it will impact the manner in which you can sell or pass on your business and/or the assets within it.  You should therefore think about how this will work in terms of your overall goals and whether there are variations you could make to maximise your growth, so that you can achieve these goals faster.

Some of the variations you could consider include:

  • Trusts – enveloping your business affairs in a trust structure could provide you with an added layer of protection or anonymity.
  • Owning business assets in your own name – some businesses will own buildings, machinery and suchlike. Owning them personally rather than under the company name could add a layer of protection from creditors or help you achieve those lifetime goals, depending on what they are.
  • Differing share classes – issuing shares with different rights has the benefit of enabling certain shareholders to retain control of the business operations whilst others just receive the benefits, such as dividends.
  • Charities and foundations – for those who wish to make a social impact, forming a charity or foundation could be a more efficient and viable route to continue your philanthropy in the long-term.

No matter what business structure you consider or want to adopt, we always advise that you assess the impact it will have on your personal affairs.  This is where you can often lose or add personal value, as well as improving your overall business growth.

We have seen many situations where short terms actions and goals have impacted the long-term plans for the business. For example, business owners sometimes distribute shares to young children of the family so they can extract tax-free dividends.  This may seem like a good idea, but it can hinder longer-term plans to sell the business as children are unable to authorise the sale of their shares.

So, whilst you may not be ready to sell or retire just yet, it is important to think about what this may look like from the outset as it should form part of your plans for how you structure and manage your business.

  1. Are your agreements fit for purpose?

Business agreements are not an area that we advise on specifically, but we cannot stress their importance enough.  Having the right structures and agreements minimises your personal liability to creditors and protects your credit rating, they can also prevent issues with your business partners from sabotaging your personal goals.

Many business relationships are formed on trust, particularly where partners are related or in a romantic relationship.  Unfortunately, just like marriage business relationships do not always work out.  To reduce the chance of serious disputes and minimise the impact on your personal relationship, it is important to document the terms of your arrangement from the outset.  The right terms can enable the business to continue if one partner wishes to leave or give you first refusal if a shareholder intends to sell.

As a busines owner, agreements such as your shareholder or partnership agreement will also interact with personal documents like your Will.  However, most people speak to a company solicitor about their shareholder agreement and a straightforward will writer about their Will.  Remarkably few seek advice from someone who understands both documents and the way they connect.

This can cause real issues as your Will should direct what happens to your business and personal assets on your death.  If this conflicts with the terms set out in business agreements, it may mean that your wishes cannot be upheld.  For example, if you are in a partnership and do not have a legal partnership agreement or do not have the correct terms within the agreement, the partnership automatically dissolves on the death of one of the partners and the partnership assets have to be sold.  Effectively, your business shuts down and the assets are split between the partners.  In a limited company scenario, if the shareholders agreement does not have the appropriate cross-options, your beneficiaries may be forced to sell the company to other shareholders and this could have a significant impact on the amount of inheritance tax they pay on your death.

A worse situation could be not having a will, especially if your aim is for your business to keep operating.  Without a Will, you have no control over who inherits your share of the business and will be unable to dictate what they can do with it.

Having a Will, especially where there is a business, can save hundreds of thousands of pounds and prevent unnecessary disputes. The last thing anyone wants is for their hard-earned money to be spent on legal costs fixing a problem that could have been avoided with the correct documents, especially if one of your personal objectives is to look after particular family members.  We have known situations where the bulk of an inheritance has been lost and businesses have been forced to close because the owner did not leave a valid Will.

  1. Have you considered all aspects of protection planning?

Most entrepreneurs invest so much time in their business they cannot imagine being away from it for a prolonged period. This could be why we find the most significant element of protection planning that business owners overlook is what would happen if they were incapacitated.  You are still alive so your Will cannot come in to play, but you do not have the ability to look after your business.  Some businesses will have key person insurance, but what about the operational impact?

Who will sign the contracts? Who will access bank accounts to pay bills?  Who will authorise wages and other costs?

The Coronavirus pandemic is a stark reminder that anyone can become temporarily or more permanently incapacitated.  Without effective planning the operation of the business could come to a standstill and if that happens the business may incur significant losses and reputational damage, or even be forced to close.

To mitigate this and make sure that your business continues to properly operate you should consider executing a Business Lasting Power of Attorney, which will ensure the right people step into your shoes and your business can continue to run smoothly in your absence.  This is as important for investors as it is for business owners.  Without an appropriate Lasting Power of Attorney your financial advisors will not be able to take instructions from anyone other than yourself, so your assets could depreciate while you are out of action.

  1. Are you depreciating value by paying unnecessary tax?

Tax is a big factor to consider when making financial decisions that affect both the business and your personal returns. Income tax, capital gains tax (otherwise known as CGT) and inheritance tax are the main taxes that you pay personally and will form the focus of our consideration in this article. The amount that you pay is going to be affected by the structure of your business and other investments.

Income tax is paid on any income you receive from your business, including a salary or dividends.  At the highest level you could be paying 45% tax so it is very important to consider different options and structures which may help you reduce that liability.  In some situations, a 45% tax liability can be reduced to 19%. Not with magic or fancy schemes, simply by changing the way your assets and investments are structured.

The same goes for capital gains tax. CGT is not just relevant when you are selling a whole company but also in the sale of parts of the business or personal assets.  There are some effective and legitimate reliefs available such as Entrepreneurial Relief, which can assist you in reducing what can be up to 20% in CGT (for non-property assets) to 10%.

It is also worth thinking about inheritance tax as your estate will generally pay 40% of its value at the date of your death, after deducting reliefs and exemptions. That is a large chunk of your hard-earned assets that may go to the taxman instead of your loved ones.

The good news is that it is possible to mitigate inheritance tax liability on the value of your business if it qualifies for Business Relief. It is important to take advice on this as the criteria are very specific and the HMRC is very active in challenging Business Relief claims. The way in which you manage your business, have it structured, and even sell or transfer your business will impact your estate’s liability to inheritance tax. So, if your lifetime goals and objectives include some involvement from your family, working to mitigate the inheritance liability should be an important part of your planning.

It is essential to look at the working of all the taxes together rather than in isolation as there is little point in saving inheritance tax, for example, if you then increase your CGT liability. Any planning should be tax efficient overall and consider how you wish to access your capital so that you can maximise your return in the short, medium and long-term.

Final thoughts

As an entrepreneur your professional and personal life will always overlap, but many people do not realise the extent to which this interaction can affect their ability to achieve their lifetime goals.  The key is to work with advisors who will consider your overall objectives and help you to manage all of your affairs in a wholistic way, ensuring you are being as effective as you can be.

This is the area in which we specialise, we assist entrepreneurs and investors to align their business and personal affairs so they can achieve their lifetime ambitions   The advice and structure will not be the same for everyone, the important part is that you are able to achieve what you set out to, and to make changes as your aspirations evolve.

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