Can business owners afford not to take financial advice?

Whilst many business owners will employ the services of an accountant, they may find it harder to visualise how working with a financial adviser could benefit their bottom line.

There’s a myriad of planning opportunities that can be missed in the absence of professional financial advice. Let’s look at four key areas.

Pensions

Most business owners will be aware via their accountant that employer pension contributions are classed as a business expense and therefore reduce the corporation tax liability of their company. Without the guidance of a financial adviser, however, these are some other pension-related opportunities that could be overlooked.

Carry forward rules – these enable business owners to use any unused annual allowance from the last three tax years. The benefit here is they can play ‘catch up’ with excess profits, if for example they have a business where profits can vary widely year to year or if they have previously reinvested back into the business rather than paying themselves.

Ability to buy commercial property within a pension scheme – It’s possible to purchase commercial property via some self-invested personal pensions (SIPP) or small self-administered schemes (SSAS) and some providers will only offer access to this via a regulated financial planner. Premises can then legitimately be rented out to the business and rental funds paid back into the pension scheme. The SIPP can also take out a mortgage (maximum borrowing of 50% of net SIPP value) to fund part of the property if funds are not sufficient to buy it all.

Benefits include the fact that rental income adds to the pension scheme value and isn’t subject to income tax. It’s also not classed as a contribution and so business owners can still make employer contributions up to their annual allowance or personal contributions up to their relevant/earned income (also limited by annual allowance). If the property is sold, there is no capital gains tax liability upon the capital growth because the proceeds are added back to the pension scheme value.

Remuneration strategies

Although remuneration strategies are traditionally the territory of an accountant, financial planners can ensure that all of the business owners’ individual circumstances have been taken into account, especially for those who are paying for simple bookkeeping rather than a proactive advisory service from their accountant.

Higher earners may not be aware that they start to lose their personal allowance over £100,000 of income and that for every £2 they earn over this threshold, they lose £1 of their personal allowance. This can particularly be an issue where business owners draw dividends from the company on an ad-hoc basis with no formal plan in place, meaning the total remuneration for the year can easily be overlooked.

It’s also possible to reduce the corporation tax liability of a business by employing family members, such as older children, and paying them a market-value salary for work undertaken within the business. This could then be used to fund university costs for example in a tax-efficient way.

Protection

Business owners generally put a huge amount of effort and focus into getting a business off the ground and becoming profitable. Without financial advice, however, they often overlook protecting the continuity of the business for other directors and employees, as well as protecting their family or spouse financially.

Key-person insurance is a type of business protection policy that would pay out in the event of the death or critical illness of anyone who is essential to the financial success of a company.

Relevant life cover is then a tax-efficient way for an employer to provide term assurance for both themselves and their employees and arranging it through the company means it’s a tax-deductible expense.

Shareholder protection insurance then provides a lump sum in the event of a business owner’s death or critical illness, to ensure the remaining business owners could afford to purchase that share of the business. This is often set up in conjunction with a shareholder agreement that gives the surviving owners a legal right to purchase the deceased owner’s share. There are two main types of shareholder agreement.

A cross option can be triggered by either the shareholders or the beneficiary, if either wants to buy/sell, whereas a single option is one-sided and usually means shareholders can force beneficiaries to sell their shares if they want them to.

Personal wealth

It’s not uncommon for business owners to have a lot of assets tied up in their business but very little personal wealth. Professional advice provides a holistic view of how their business and personal wealth fit together, including that of any spouse. This helps to build long-term financial resilience that may otherwise be lacking and ensures that there are no assets or income where opportunities are being overlooked.

Cashflow modelling is key in helping a business owner to scenario plan and feel comfortable to start to allocate income to pensions or other investments, that will ensure they are well provisioned in the future. It’s also vital when it comes to planning for retirement as it reveals how much money they need to realise or extract from their business in terms of their succession planning.

Rather than wondering if they can afford professional financial advice, therefore, business owners should actually be wondering if they can afford not to, in terms of the value, protection and tax efficiencies it can deliver, both in the lifetime of their business and beyond into their retirement years.

If you would like to discuss these or any other business or personal planning issue please get in touch.

01733 314553                     info@brookswealth.co.uk                      www.brookswealth.co.uk

By Luke Norman Chartered financial planner for Professional Adviser magazine