Business needs change over time, so financial strategies also need to evolve. Here, AFWM’s Harry Griffiths shares how to protect your business, manage profits effectively and plan for retirement and succession.
LAYING STRONG FOUNDATIONS: BUSINESS PROTECTION
Business protection is often overlooked; however, having adequate policies in place is essential. Many companies rely on a small number of key individuals, so unexpected events such as illness, incapacity or death can have a major impact. Business-specific insurance offers stability, helps ensure continuity and can give directors and their employees vital help when they need it.
Ongoing regular reviews are critical because business value, shareholdings and key individuals can change, impacting protection needs.
Shareholder protection
In the event of a shareholder’s death or critical illness, this cover ensures that sufficient capital is available for the remaining shareholders to purchase the affected individual’s shares. This arrangement provides valuable peace of mind, guaranteeing that the deceased’s estate receives a fair and timely payment, while preventing the estate from being burdened with unwanted shares. At the same time, it allows the remaining shareholders to maintain control of the company without disruption. Cross-option agreements underpin this process, granting the estate the right to sell and the shareholders the right to buy – both parties are obligated to proceed if either exercises their option – creating a clear, legally binding mechanism for a smooth and equitable transfer of ownership.
Key person cover
Losing a key individual can lead to revenue loss, contract disruption and operational setbacks. Key person insurance offers a financial buffer – helping the company to recover, hire replacements or repay loans if needed. Key person life cover and/or critical illness cover can provide a lump sum or money in the event of the death or critical illness of a key employee.
Key person income protection could provide a monthly income at the end of a chosen deferred period in the event of a key individual’s prolonged absence due to illness or injury. Loan protection should also be considered, as this helps to pay any outstanding loans or debts after the loss of a guarantor or key individual.
Relevant life cover
This tax-efficient life insurance policy enables directors to provide death-in-service benefits for themselves and their employees, with premiums paid by the company and usually treated as an allowable business expense. If structured properly, these policies do not attract benefit-in-kind tax and are paid to the chosen beneficiaries without attracting any inheritance tax.
Private medical insurance (PMI)
PMI offers directors and employees quicker access to diagnosis and treatment, reducing downtime and supporting recruitment and retention. When paid for by the company, it may also be more tax-efficient than personal arrangements.
MAKING PROFITS WORK
Once the business is stable and profitable, attention turns to how best to manage surplus capital. Strategies here can improve returns, reduce tax exposure and contribute to personal financial goals.
Cash management platforms
Retained profits often sit in business accounts earning low interest and exceeding FSCS protection limits. Cash management platforms allow funds to be spread across multiple banks – each covered by FSCS up to £85,000 – while also accessing competitive interest rates. These platforms provide consolidated reporting and retain liquidity, helping surplus cash work harder without compromising safety.
Corporate investments
Companies may have excess cash building up that they do not want to reinvest in operations or distribute out of the company. In such cases, it is possible to invest this excess cash in a corporate investment account. By having the cash invested over the medium to long term in an appropriate portfolio of funds, it is possible to have this money working harder within the business by giving the potential for greater returns than that available from cash on deposit. There are, of course, risks involved with investing, so having the investments properly tailored to your risk appetite is essential.
Pension contributions
Company-funded pension contributions remain one of the most tax-efficient methods for extracting profits from a limited company. These contributions are treated as an allowable business expense, which directly reduces the company’s corporation tax liability. Additionally, unlike salary payments or dividends, pension contributions do not attract employer or employee National Insurance contributions, further enhancing their tax efficiency.
Contributions can be flexible and strategically timed to align with the company’s cash flow and profitability, allowing directors to make larger contributions in more profitable years and reduce or pause them when cash is tighter. Importantly, employer pension contributions are not limited by the director’s earnings, unlike personal contributions, providing additional flexibility to maximise pension savings. The current annual allowance for pensions limits the amount that can be contributed each year to £60,000, but unused allowances from the previous three years can be carried forward – providing valuable scope to make larger contributions if needed.
Clearly, not all companies will be able to make such large contributions. Like any business expense, to be an allowable deduction against profits, pension contributions must be made wholly and exclusively for the purposes of the business – i.e. the contribution should be at a reasonable level for the individual concerned. We work closely with other financial professionals, such as the company’s accountant, to ensure that any contributions are appropriate.
LOOKING AHEAD: RETIREMENT AND ESTATE PLANNING
Eventually, the focus shifts to exiting the business and securing long-term financial independence. This often involves drawing together pension assets, investment portfolios, business proceeds and other income sources.
Integrated retirement planning
Whether the business is sold or retained for income, it’s essential to understand how different assets interact to fund retirement.
Cashflow modelling is central to this. Financial advisers use forecasting tools to simulate various scenarios – exit timing, sale value, tax implications, inflation and expenditure – to assess how sustainable a retirement plan is. These models provide clarity and confidence when deciding how and when to step back from the business.
Estate and business relief planning
Effective planning ensures that wealth can be passed on in a tax-efficient manner. For owner-directors wishing to keep the business in the family or pass on shares, business relief (BR) can significantly reduce – or even eliminate – inheritance tax exposure, provided the qualifying conditions are met. Additionally, if owners sell their business shares, then reinvesting the proceeds into other BR-qualifying assets within a set timeframe (usually within three years) can offer a couple of key advantages.
Firstly, capital gains tax (CGT) on the disposal can be deferred through business asset rollover relief. This deferral can be beneficial by postponing the CGT liability until the owner is in a lower tax bracket or until death, when the shares’ base cost is stepped up, effectively eliminating CGT on the gain for beneficiaries.
Secondly, if the original business shares were already BR-qualifying and held for at least two years prior to disposal, reinvestment into new BR-qualifying assets provides immediate eligibility for inheritance tax relief on those new assets, without needing to satisfy a new two year holding period.
AFWM’s financial advisers can provide valuable guidance in identifying suitable BR-qualifying assets for reinvestment, helping to achieve tax efficiency along with greater liquidity and diversification.
THE ROLE OF INDEPENDENT FINANCIAL ADVISERS
Financial planning for limited company owners isn’t static – it evolves with the business. From ensuring adequate protection at the outset, to managing profits tax-efficiently, and finally preparing for a well-structured retirement and estate plan, your strategies may need to adapt over time. The above points highlight just a few areas that need to be considered – there are of course many more and AFWM can support you with these, bringing together the technical knowledge and strategic oversight needed to help you make informed choices at every stage.
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THE VALUE OF UNITS CAN FALL AS WELL AS RISE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS.