Introduction
Every accountant says they’re proactive and they do the best for their clients and of course we do too. The difference is we can prove it. Here is a selection of case studies showing the sort of impact we can have on our client’s businesses. The names have been changed to protect the innocent!
Just a word of caution, these case studies relate to a point in time and legislation may have changed since then or there may be specific conditions satisfied by the individuals involved which do not apply to everyone. To help you the detailed technical conditions have been kept to a minimum.
Russell’s story
Hi, my name is Russell.
I own a design company that trades through a limited company. Over the years the business has been very successful, we make profits of around £300k and we have built up substantial cash reserves of £1m because I have only ever extracted cash to support my lifestyle.
I’m 58 and plan to sell the business in 5 years so that I can retire, my accountant told me that any purchaser of the business would not want to buy it with a large cash balance. Furthermore, he thinks there is a risk that for CGT and IHT purposes it might not attract the necessary trading reliefs which could increase any tax paid. We decided therefore that it makes sense to extract the cash, but I was worried about the amount of tax that would be payable.
I already extract my remuneration in the form of a small salary of around £8k and then dividends of £70k, I already pay higher rate tax at 32.5% of my net dividends on a substantial part of these.
My accountant explained that if I took the cash surplus in the form of dividends then I would pay additional income tax of 32.5% of the amount received. If I took it in the form of salary then I would pay tax at 40%, national insurance at 2% and the company would pay national insurance at 13.8%. The company would get a deduction against its corporation tax bill. Taking all of this into account the dividend route was the best option but still pretty costly.
My accountant had an idea for how we could do things differently/
The option was to make some large pension contributions on my behalf from the company if I wanted I could contribute £80k initially and then £40k per year, which would reduce the company’s corporation tax bill and I would have no tax or national insurance to pay. There would be restrictions on what I could do with the money in the pension scheme but it would grow tax-free. I could even buy some commercial premises and the rent paid to the pension scheme would not be taxable. On retirement, I could make a 25% tax-free withdrawal and because I was over 55 I could draw down on the pension over several years and pay income tax at normal rates. Over the 5 years, I could extract a significant amount of the reserves tax-free.
I am now deciding on the best course of action but I am very pleased that my accountant was able to come up with alternative solutions.
Ozzy
Hello, my name is Ozzy,
I’m a self-employed IT contractor and my income is £131k per year [including £13k from income derived from my late father’s estate referred to below]. I am married to Sharon. Our two children, Jack and Kelly, have both left home. I have always wanted to retire at 60. I haven’t made any pension contributions for two years.
Sadly, my father died recently and I inherited £300,000 in cash. I made an appointment with my accountant to discuss the options.
My accountant advised me that due to the level of my income I lost £1 of my personal allowance for every £2 my income was over £100k.
We discussed how to invest the £300k in a more tax efficient way with their independent financial advisor.
The first step was to take some of the £300k and invest it in ISA’s, which are outside the scope of income tax and capital gains tax, this amounted to around £20k each for me and my wife. As we’re approaching the tax year-end we can use this year and next years allowance The remaining cash was invested in an offshore bond.
This allowed me to invest in a wide range of assets based on my attitude to risk. I can draw 5% of the capital value each year but this is not treated as income and so doesn’t reduce my personal allowance.
My pension requirements were considered and I agreed to contribute £20k this year. As my total income is now below £130k my pension contributions are not restricted.
My taxable income is now £98k [£131k less £13k less £20k] and so I still have my full personal allowance too.
Let’s hear from Sarah
Hi, I’m Sarah,
I have been running my logistics company for 12 years and we’ve grown steadily over that time but last year we won a huge new contract yay!!!!!
We have always operated out of several warehouse sites which we have rented, it has sort of grown haphazardly and we’ve taken on new units as we’ve needed them but when we won the new contract I decided to think strategically about our property position.
I talked to my accountant and we agreed that it was time to bring all the warehousing into one large building and buy instead of rent. I would then be building capital rather than paying other peoples mortgages for them. We found a great unit at a great price which really suited us. Our bank was happy to help because we had a good deposit and a great trading record. Our accountant helped us prepare the financial projections that showed it was viable and it was full steam ahead
The only thing to decide was how to structure the ownership of the new property, my accountant carefully explained the 3 possible routes and their advantages. I confess the third option was something I had not thought of – using a self-administered pension scheme.
We could make contributions to our pension scheme to bring the value up to an amount that would enable the scheme to borrow the money to fund the property. These contributions were deductible from our company profits for tax purpose, so we’re making savings straight away.
Once the property was owned it could be rented to the Company, the rent being deductible against corporation tax, but the rent received by the pension scheme was tax-free. Any capital growth on the property was also tax-free.
The final bit of good news that under new rules I can extract funds once I’m 55 without having to worry about annuities and things like that, and only pay tax on it as if it was normal income.
A great solution and an option I wasn’t aware of from my accountant, my hero.
Kelly’s story
Hi, Kelly here,
Around ten years ago after some frustration with the family business I decided to branch out on my own. I felt that I had a lot of ideas that the family would not entertain, but I thought would make a much more profitable business. I had done okay with the family business and had the financial clout to open my new venture.
We sell a second-hand product and the margin is very low, but my idea was to shift a lot of stock in a systemised way to keep overheads down. It worked and turnover was around £60m after 4 or so years. I have a lot to thank my management team for who ran it on a day to day basis and who were very effective. My profits were over £1.5m, very good in my industry for the turnover.
I had used the family accountants to handle everything but became frustrated by their lack of ideas, they never had any. We eventually changed to a new chap who promised to be more proactive.
In the first year that the new chap was working for us in the meeting to discuss the accounts, we were told that the margins we achieved on slightly older goods were better than what we achieved on the nearly new. It was only 0.5% but on our turnover that was an additional £350k. My management team are really good but it shows that sometimes an outside view is very useful.
Victoria
Hi, there I’m Vicky,
I’ve always been in partnership with my husband, David, until a few years ago. My accountant said it was time to convert us to a Limited Company. I run an Audi Q7 and the Co2 emissions are terrible, I know I should have a more efficient car but I love it and so do my three kids and it’s great for ferrying them around. David’s sports car isn’t practical.
I’d heard that when you convert to a Company the downside is that you get a big tax bill if you have a company car especially a gas guzzler like mine. I was worried any tax benefit from the Limited Company would be wiped out. My accountant had an idea, a parallel partnership which ran the cars alongside the Limited Company. In the end, my tax on the car didn’t change when we converted, but my accountant made sure I knew that he had saved me over £8k with his nifty planning, more than enough for a new handbag!
