Tag Archives: cost of living

Simon Martin, Financial Planning Week tip: Corporate investing – creating an income in retirement

An outline of the opportunities that apply to company shareholders.

Many of our financial planning clients who own a SME business, ask the question “what should I do with surplus capital owned by the business?”

For many, the tax efficiency of extracting money via a pension makes this the default recommendation. But what about our clients who are limited in their ability to make a pension contribution due to the annual or lifetime allowance?

Where these clients have surplus capital within the company, and a concern about both low interest rates and higher inflation, investing within the company can make sense. Using an equity-based collective investment allows the gains to be deferred until surrender and the dividends to effectively be paid tax-free to the company as “franked income”.

Over the long term, history shows equity investing gives a great opportunity to achieve returns greater than inflation. Structuring the investment in a tax efficient manner increases the attractiveness even more. As the investments remains owned by the company, the funds can be used for future business purposes where required.

The potential advantages of corporate investing are clear; however, the question remains as to how the money can be extracted from the business in a tax efficient manner.

Planning opportunities – retain the company

One option is to retain the investment within the business after the company has stopped trading and treat the company as an investment company. The shareholders can then draw the dividends during retirement from the now investment company until they are exhausted. This is especially attractive for a company that could not be sold, such as a consultancy company.

Typically, an investment company will not qualify for capital gains tax Business Asset Disposal Relief (BADR) or inheritance tax Business Relief. However, drawing the funds as income means there will never be a capital event and therefore the loss of BADR is inconsequential. In addition, where the capital is drawn and spent during the owner’s lifetime, Business Relief becomes less relevant.

Your client, the owner of the business, and potentially their spouse/civil partner would be able to use the dividend income from the company, once they finished trading, to fund retirement. Each spouse/civil partner could use their £12,570 personal allowance and £2,000 dividend allowance with the remaining income in the basic rate taxed at just 8.75%.

Note that when a company declares a dividend, the proceeds must be split equitably, according to the number of shares each shareholder owns at the time. So, for example, two 50% shareholders, holding the same type of shares, would each receive the same level of dividends. Also, a dividend is a payment a company can make to shareholders if it has made a profit. A company must not pay out more in dividends than its available profits from current and previous financial years. For more information please see Dividend payments by a company.

Assuming each spouse/civil partner took an income up to the basic rate tax threshold, they could extract £100,540 annually (£50,270 each) with a tax rate of just over 6%, lower even than the 10% BADR rate which may have otherwise been available.

Having the additional income can create several opportunities for our clients, including retiring before the State Pension is available or simply providing a greater income during the early retirement years where the client’s expenditure is often higher.

In addition, this allows our clients to leave their tax efficient pension funds invested for longer before drawing down the funds, increasing the value of the inheritance tax efficient assets they hold.

Retaining the company structure also provides the opportunity to gift shares to the next generation as part of an intergenerational plan.

Comment

Whilst corporate investing is an important part of an SME financial plan, consideration of exit is equally vital and should be discussed with your client alongside their other professional advisers.

Karen Searle, Financial Planning Week Tip: Closing the protection gap in a cost crisis

Why good financial planning should be all about protecting what you already have.

You will have been hard pressed over the last few weeks and months to miss the daily headlines around the “cost of living crisis” currently sweeping the UK.

What do we mean by ‘cost of living crisis’ – and why is it happening?

A “cost of living crisis” simply refers to a scenario in which the cost of everyday essentials like energy and food is rising much faster than average incomes.

A rapid increase in energy costs, particularly the wholesale price of gas, has been a key driver of the recent increases in inflation. Housing and household services (which include electricity and gas) and transport (which includes motor fuels) contributed to over half of annual CPIH (Consumer Prices Index including owner occupiers’ housing costs) inflation in July 2022.

Although increases began in early 2021, this year is likely to be remembered for the sharpest drop in household incomes on record, thanks to a dramatic surge in inflation.

In 2022, all food prices are now predicted to increase between 8.5% and 9.5%. This means that conversations around keeping food on the table and a roof over your client’s heads are more important than ever before.

Our role as financial advisers is key in having the conversations and talking protection in order to protect a client’s financial world and put in place an affordable robust structure of cover across the key areas of life cover, critical illness and income protection whether on a personal basis or as business protection.

So, how do we talk protection in a cost crisis?

With inflation up and the real value of wages down, maximising your client’s spending power and educating them on how to channel their money to best effect is paramount.

Our biggest role at the moment is to educate our clients:

  • Go through accurate budgeting with your clients, including looking through bank statements – review standing orders and direct debits to identify any areas that could help save them money.
  • Help them make honest decisions around where they spend their money to get the best value.
  • Have open conversations regarding their finances, needs, concerns and goals.
  • Encourage them to plan and consider the impact of “what-if” happening.
  • Think about the messages we give to our clients and the language we are using around budgeting, pricing and value.
  • Re-affirm and remind clients why they had put the cover in place originally and the financial hardships it is there to prevent.

If your client has existing policies in place for life cover, critical illness or income protection, try to focus on the value of this and not focus on the actual cost. Instead, highlight the potential cost of not having it.

Adviser attitude and approach is as important as the client’s.