12:00 AM 23rd October 2024
business
Joshua Castle Chartered Financial Planner at Progeny
Image by Gerd Altmann from Pixabay
Business owners may sometimes overlook the benefits of professional financial planning until the point that they are considering their exit strategy. However, financial planners can support business owners at all stages of the business life cycle, working hand in hand with accountants and legal professionals, to ensure that as well as running their business, they are able to capitalise on available opportunities and avoid common errors.
Let’s look at how financial planning can add value at three key business life stages.
Launch
The early stages of a business are understandably when owners tend to be heavily focused on growth and the journey towards profitability. They will typically be working with an accountant to be paid sensible levels of income and dividends, but a financial planner can help to ensure that there are good foundations in place for financial resilience, as well as bringing a more holistic lens, especially if the business owner has a partner or family.
According to research, 83% of family run business owners are relying on their business to fund retirement, but this can be a risky strategy in terms of financial resilience. They could also be missing out on the opportunities that pensions offer for reducing taxable profit for limited companies.
Without advice, protecting the continuity of the business for other directors and employees is also often overlooked, as is financial protection for their own family. This could involve solutions such as key-person insurance, a type of business protection policy against the death or critical illness of anyone essential to the financial success of a company, or shareholder protection insurance, which provides a lump sum to purchase a business owner’s share of the business in the event of death or critical illness. Relevant life cover is then a tax-efficient way for an employer to provide term assurance for both them and their employees and arranging it through the company means it is a tax-deductible expense.
Josuha Castle
Growth
As the business matures and profits hopefully rise, focus will then be on how to extract these profits tax efficiently.
The drawing of sensible profits to not incur tax liabilities is key and higher earners may not be aware that they start to lose their personal allowance when earning over £100,000 of income. Planners can also look at carry-forward rules, which allows them to utilise any unused annual pension allowance from the last three tax years and essentially play ‘catch up’ by contributing excess profits to pensions.
For businesses with large profits, things become more complex. Working in partnership with an accountant, planners may be able to give advice on taking a larger amount of profit out of the business but then mitigating that tax liability within the same tax year by moving the funds into a scheme that offers tax relief. This can involve using government approved tax advantaged schemes such as an Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCT).
There is also the opportunity to either invest in the name of the business or use a holding company or connected investment company. Whilst this does not move funds into personal names, it can be used as another form of saving for retirement, separating funds from the main trading company and giving business owners assets that can be drawn on beyond their working life. Naturally there are tax implications to this, meaning conversations need to take place between clients, planners, tax advisers and the company accountant, in terms of solutions that may or may not be appropriate.
A planner will also support business owners to focus on making the most of these prime years outside of the scope of their business, looking at personal investing to complement saving for retirement, to create individual wealth and financial resilience.
Image by rawpixel from Pixabay
Maturity
When it comes to retirement planning, how much money a business owner needs for a comfortable retirement can be hard for them to quantify and cashflow modelling is key to determining this based on both their aspirations and planning for life’s uncertainties With the support of a financial planner, they may realise they need to spend some more time growing their business before exit, or conversely that can retire earlier than they anticipated.
Decent pension savings can also mean that getting the highest offer may not be so much of a priority in the event of a business sale, or that the owner feels comfortable to reject lower offers and sit and wait for the right deal.
Legacy planning can also be drawn into a company sale and working with their legal professional, shares could be gifted to children as part of the deal pre-sale for example. Planners can then advise on financial gifts to family members post-sale, either directly or via trusts, as part of estate planning, as well as money being invested for their benefit.
The value of ongoing financial planning throughout the business life cycle is that it leaves the business owner free to concentrate on what they are good at. Meanwhile, the planner can focus on helping them make the most of what they generate and ensure funds are useable and available when they need them. This partnership, over the course of a working life and beyond, can generate many financial gains, and contribute to much greater financial resilience and peace of mind.
This post was originally published on here
