30 entrepreneurs Tax for entrepreneurs explained
Entrepreneurs have been much maligned in recent years as among those not paying their fair share of tax. Equally, however, the Government has introduced many tax incentives aimed at entrepreneurs, which recognise how they use their additional cash investing in businesses to stimulate the sluggish economy and benefit us all. Vicky Lad from the Thames Valley office of leading business and financial adviser Grant Thornton UK LLP gives an overview of legitimate tax planning opportunities around income tax and capital gains tax (CGT) available to entrepreneurs
Income tax
The top rate of tax is currently 50% for income in excess of £150,000, but this is reducing to 45% from April 6, 2013. If considering taking a bonus, it is worth bearing in mind the timing to take advantage of the reduction from 50% to 45%.
Tax-efficient investments such as Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) attract income tax relief of 30% on investments of up to £1 million and £200,000 respectively. In addition, the new Seed Enterprise Investment Scheme (SEIS) gives income tax relief of 50% on qualifying investments up to £100,000. There are various criteria that both investor and company have to meet to qualify for these reliefs but some of these have been relaxed in recent years to make the relief more available.
Pension planning
Pensions are a tax efficient way of saving for retirement. Each person has an annual allowance of £50,000 (gross), which can be contributed to pension funds. Any unused annual allowances during the previous three tax years can be carried forward and used now, which means anyone could potentially invest up to £200,000 now.
Pensions are tax efficient in a number of ways:
• for every £1 put into a money purchase pension, the Government adds 25p, which accounts for the basic rate tax that would have been paid on this income
• higher or additional rate taxpayers can claim further tax relief of 20% or 30% (25% from April 6, 2013) respectively on their pension contributions
• the investments grow in the pension free of income tax and CGT
• tax benefits can be further enhanced if paid by an employer.
There is a limit on the value of retirement benefits that can be drawn from pension schemes before tax penalties apply.
Capital gains tax The CGT rate is currently 28% (or 18% up
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to the basic rate band limit for basic rate taxpayers). This is considerably less than the current income tax rate so, wherever possible, it is best to receive funds that are classed as a capital gain rather than income.
Another simple planning tool is to transfer assets to a spouse prior to sale so make use of their annual exemptions and use up their basic rate bands. Care should be taken if the asset also qualifies for entrepreneurs’ relief (ER) as you could easily lose this valuable relief by transferring a qualifying asset. Transfers between spouses are not taxable. However, if you were considering transferring assets to other individuals, for example, your children, then a capital gain could arise.
A particularly useful tool for the entrepreneur is ER. If ER is available then the capital gain will be taxed at the lower rate of 10% on gains of up to £10m over your lifetime. ER is generally available on a material disposal of business assets, which includes shares in a company of which the shareholder owns at least 5% and is an employee, director or company secretary. There are various criteria that need to be met to qualify for this relief, the main one being that the qualifying conditions must have been met for a whole year prior to disposal. Therefore, if you are planning to sell a business or business asset in the future, it is imperative that you start planning well in excess of a year before the sale to ensure that you will qualify for ER.
Investments in EIS/VCT are also efficient for CGT purposes. Any gains made on the investments themselves are not taxable. In addition, if you have other capital gains in a year, you can defer the capital gain with the investment into the EIS subject to certain conditions. Again, care should be taken if the asset being sold qualifies for ER as this could be a trade-off between losing ER to obtain the deferment.
And finally
These are just a few of the tax relief tools available that are supported by the Government. Some of the investments and planning tools can be complex, so it is always worth speaking to a professional tax adviser to ensure adequate tax planning.
THE BUSINESS MAGAZINE – THAMES VALLEY – NOVEMBER 2012 Vicky Lad, assistant manager, tax
Details: Vicky Lad 01865-799890
victoria.r.lad@
uk.gt.com
Samantha Vanags, partner, tax
Details: Samantha Vanags 01865-799805
samantha.j.vanags@
uk.gt.com
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