The current economic uncertainties have presented an opportunity for us all to take a step back and to review our outlook and goals and assess whether the recent pandemic has changed these. Whist we would recommend that a review of ones affairs is carried out on a regular basis, now is an ideal time to undertake such a review. Any planning should consider both the commercial and taxation implications, detailed below are examples of some areas that should be considered.
Companies and Corporation tax
Restructuring your company to ensure trade and assets are protected
It may be that one part of the business of the company is doing well and another part is struggling or due to the current economic climate you are worried about the outlook and want to ensure any assets owned by your company are protected from future uncertainty. In order to protect the successful business and the assets, it could be useful to demerge the businesses into a separate company or to transfer assets out of a trading company in to a separate company in order to protect them from any future downturn in fortunes. Structured correctly this can be done in a tax efficient manner and also protect the shares from any potential inheritance tax charge arising on death.
Incentivising with non-cash arrangements – share option schemes
Now may be a critical time to ensure that companies retain their high-quality employees but, due to the current situation, you may be unable to increase salaries or match salary levels paid elsewhere. There could be an opportunity to incentivise employees using share options under the enterprise management incentive (EMI) scheme. An EMI scheme is a tax-advantaged employee incentive scheme aimed at small entrepreneurial companies. An EMI scheme is flexible enough to allow for the options to be geared to future capital growth and performance targets. So long as the options still qualify for EMI status throughout the period of ownership, the employee should be able to take advantage of income tax and national insurance reliefs. In addition, the company may be entitled to a corporation tax deduction equal to the difference between the price paid for the shares and the relevant market value.
The Covid-19 pandemic and associated economic downturn presents a good opportunity to agree very low valuations with HMRC for the purpose of EMI share option schemes. If possible, now is therefore very much an optimum time for implementing an EMI share option scheme and granting tax efficient options to key employees.
It is also a good idea to review any existing share option schemes that you have in place to ensure they are still fit for purpose. Due to recent events it is possible that the value of the share options may be “underwater” and as such no longer meet the needs of either the employer or employee.
Individuals and personal taxes
If the value of your investments has fallen now may be a good time to consider transferring them to family members. A transfer between husband and wife or civil partners does not give rise to a tax charge but a transfer to any other family member does. Any gain is based on the market value of the asset at the time of transfer. If the value of an asset has been depressed as a result of the current situation it may be worth considering transferring these assets to reduce any potential capital gains tax charge. This should also be considered if you are transferring assets as part of any inheritance tax planning.
Irrecoverable loans to traders
An allowable capital loss may be available where loans made to traders become irrecoverable or a payment is made to satisfy a guarantee on behalf of a trader. This would include credit balances on a director’s loan account but not ordinary trade debts. Once the loss is claimed, it can be utilised in the same way as any other allowable capital loss. The key point here is that the loan has to become irrecoverable to qualify for relief. If it can be shown that the lender never had a realistic chance of recovering the money, relief will be denied. Also, the loan must not become irrecoverable purely as a result of the terms of the loan or because of an act (or failure to act) of the lender.
Negligible value claims and loss relief for shares
Should shares in a company be sold at a loss or become of negligible value, the shareholder could claim relief for the loss or deemed loss. Usually, allowable capital losses can only be set against chargeable gains. If the losses are not fully utilised against gains in the year in which they arise, the excess is carried forward to use against future gains. This rule can be broken if the loss arises on certain shares. If the shares meet certain conditions i.e. they were acquired via a new subscription in an unquoted qualifying trading company you can choose whether to set the losses against chargeable gains or income in that year, the previous year or both.
Accessing overlap relief
If you trade as a partnership or sole trader and have a year-end that doesn’t fall around 31st March, it is likely that you have some overlap relief than can be used to reduce your tax liability. Overlap relief is only accessible in limited circumstances. One of these situations is if you change the year end of your accounts. There will also be commercial matters to consider as well as tax relief but accessing overlap relief could reduce your current year personal tax liability.
If you would like to discuss any of the above in more detail or have a conversation about any other related matter please do not hesitate to contact your usual RPG contact.