Using your business as a financial planning tool

Over the years I have advised a number of business owners on their finances. I have noticed that many of these business owners are so busy running their businesses they are missing out on opportunities to use their business as a financial planning tool.

In this article I identify two powerful, and often overlooked, ways in which a business can be used as a financial planning tool. I also highlight the importance of using a business as the ‘engine room’ for the family’s finances and how this vehicle can be protected.

How can the business be used as a financial planning tool?

1. Pension contributions can be paid for by the company

There are many benefits of making pension contributions from the company.

1. The pension contributions will be treated as a company expense and will subsequently reduce the corporation tax bill.
2. It is a tax efficient way of extracting funds from the company and using them for personal benefit.
3. By paying into a pension, business owners are creating a separate vehicle to fund their retirement which is not reliant solely on the future success of the business. This is especially important in periods of possible uncertainty.
4. Unless someone can retire on the grounds of ill health or has been diagnosed with serious ill health (less than 12 months to live), a pension fund cannot be accessed until the owner is 55 years old. Depending on the age of the owner now and their intended retirement age, there could potentially be many years for the fund to benefit from compounding growth (growth on the growth of the fund) before withdrawals are made.
   
   
5. Paying for life assurance ‘on expenses’

If you are a company director or an employee and you are already personally paying for life assurance, you could save up to 49% by ‘putting the life assurance premiums on expenses’. This means that the company pays for the policy and it is fully tax deductible. It takes out the policy on behalf of an employee or director and in the event of their death, a tax free payment will be made to the deceased person’s designated beneficiaries. This is a specialist form of life assurance known as ‘relevant life’ cover.

There are a couple of conditions to this: the policy can only be in place until the person assured reaches the age of 75; and the sum assured must be no more than 30 times salary if the person assured is under age 35 (source- Aviva 14/9/18).

The benefits of this form of life assurance are:

1. the premiums are not considered a benefit in kind for the employee/director;
2. the premiums are also considered a company expense and so will reduce corporation tax;
3. the sum assured is received free of tax;
4. the sum assured is paid into a trust that does not create an Inheritance Tax liability for the estate of the person assured;
5. a trust can also be used to preserve the funds for future generations and safeguard against potential future claims by third parties;
6. the employer premiums will not count towards the pension annual allowance;
7. there will be no test against the pension lifetime allowance; and
8. the policy cannot invalidate enhanced or fixed protection.

To give an example of this expense, the cost of a policy that would pay out £500,000 on the death of a 40 year old non-smoker in good health, up to the age of 65 would be £34.68 per month (via Aegon 14/9/18).

The importance of using the business as the ‘engine room’ for the family’s finances

Company directors and employees can extract funds from the business via salaries and dividends received. These funds are used to meet their current costs of living and their future financial plans.

As well as this, the business may employ other family members including children in the future. Or, the long-term strategy may be to build up the business and sell it in order to fund the owner’s retirement or provide an inheritance for their children or great grandchildren.

Whatever the plans for the business, it is clear that its success is crucial to meeting future financial goals and objectives.

It is therefore imperative that the business is protected.

Protect the golden goose! – How a business can be protected

Arguably the most important part of a business is its staff. If a company relies on a single sales rep to bring in all new business, how would the business cope if he or she were unable to work for 6 months, or even if they were to die unexpectedly?

Not only would the company suffer a reduction in turnover but customers may seek to build new relations with competitors which could further damage the business.

To minimise the impact of this, it’s important to insure the people who are crucial to the continuing success of a business. Think about it; businesses already insure buildings, contents and machinery – in reality these items are much more easily replaceable than a key member of staff.

If something unexpected were to happen to the key person and they were insured, the business would receive a cash injection when it is most needed. This could be used to keep the business afloat while new staff members are recruited and trained up.

I believe that business owners also tend to overestimate the cost of this type of insurance. For example, the cost of insuring the death of a 40 year old non-smoker in good health, up to aged 65 for a sum of £250,000 would be just £19.35 per month (Source AIG 14/9/18).

The cost of the premiums would also be tax deductible and would reduce the company’s corporation tax bill.

If you are a business owner and would like more information on any of the points mentioned above, or to book a no obligation initial meeting, please contact me, Marc Burman.

Call 07863 103 188 or email marc.burman@fosterdenovo.com.

Levels and bases of reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

The value of your investments can fall as well as rise and you may not get back the full amount invested.

What you get back at retirement cannot be guaranteed and will depend on how much you pay in, investment performance and interest rates when you retire.

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate taxation and trust advice.