Three pre-year ending planning tips for business owners
With the uncertainty of Brexit, the impact of disruptive technology and the increase of e-commerce, there are a lot of balls in the air for business owners to consider as the year end approaches. Keeping flexible, as well as working with your key advisers with clear goals and ambitions for both personal and business assets, will help you make informed decisions on an ongoing basis and achieve your objectives. It is a useful time to dig out your business and personal plans to ensure that you are on track to meet both your long and short-term goals. The following are three tips to help you get started.
Stress test your financial forecasts to ensure that you have sufficient cash to meet both short-term and long-term needs in the event of a debtor default or a contract running over budget. Many a business has run aground by overtrading and accepting contracts either to keep staff or overpromise on ability to deliver.
Ensure you have sufficient diversification in your business model to cover a concentration risk in terms of customers, regions and products. When a downturn comes in one sector you should have sufficient alternatives to protect the business.
The New Year is a time when employees review their personal goals and ambitions. For key employees ensure that you have a comprehensive review pre-year end to communicate your vision for the business and how you see them fitting into your longer-term plans. With the economy heading towards record levels of employment, getting a replacement may prove difficult and costly in the long run. Remember that most employees leave because of a lack of career progression, job satisfaction and work life balance.
It is always useful to have a backup strategy as the best laid plans can come unstuck because of the unforeseen ill health of a key employee or the business owner/ managing director. Some points to consider are:
Insurance only becomes valuable when and if the event insured against occurs. It is only then that the real value of the premiums is highlighted.
- Keyman insurance puts a lump sum into the company to cover unforeseen costs in replacing (either temporally or permanently) a key employee.
- Shareholder insurance can provide funds to the company to allow the buy-back of shares on the demise of a shareholder, especially where the next of kin wants to exit and it is in the best interests of the company and the individual.
- Will / Enduring Power of Attorney
A properly drafted Will is essential as it allows the assets to pass into the hands of the person (in line with your wishes) who is best equipped to manage the estate at that particular point in time and possibly into the future. This especially applies to minors, incapacitated individuals or individuals incapable of managing their affairs, but can also assist with the effective intergenerational transition of assets.
An enduring power of attorney (EPA) has been described as a living Will, in that it states who is to step into your shoes if you become incapacitated and incapable of managing your affairs. The alternative is for the individual to become a ward of court with the obvious complexity and cost of managing assets. Putting in place an EPA could be one of the most cost-effective documents you sign.
- Backstop / rainy day fund
It is advisable when times are good to put aside a pool of assets that will meet the day to day expenses should fortunes change. It is also sensible to segregate this capital from the business to ensure that it is protected in the event of an unforeseen event. There is a crossover between succession planning and a rainy-day fund as some of the structures outlined below can also be used for protection purposes. With inheritance tax at 33% having a pool of liquid assets capable of meeting this liability can be a sensible approach.
It is never too early to start a succession plan and most people I speak to say they do not have one. Whether your long-term intention is to sell the business, do a management buyout or transfer to the next generation, the following structures should be considered as part of your long-term strategy. From a tax perspective there are a few reliefs that allow the asset to pass to the next generation tax efficiently. Meeting the conditions for these reliefs and avoiding any Revenue tax avoidance rules requires careful planning. Some sensible structures to consider are:
A holding company can be useful from a protection perspective as it allows you to segregate capital while retaining the asset in the group. It also allows for a tax-free sale of a trading subsidiary as part of your longer-term objectives, although it is more of a deferral as you will pay tax on withdrawal of cash from the company. Careful personal and corporate planning is required in conjunction with your legal and tax advisers to ensure the structure fits in with your financial goals.
- Separate investment company
Having a separate investment company / partnership can achieve the same outcome as the holding company but is useful from an estate planning perspective as it creates a separate pool of assets. It can also ensure the effective transfer of the business to the next generation as many of the tax reliefs only apply to trading assets.
The pension structure is an alternative to the above and can bring additional benefits such as tax-free growth, creditor protection for trust-based schemes, and the creation of another pool of assets that can assist with the equalisation of estates for the next generation.
The Department of Social Protection recently published “A Roadmap for Pensions Reform 2018-2023” which outlines potential changes to pension rules in the coming years (through the introduction of auto-enrolment). One area of focus is the cost to the exchequer of supplementary pensions and the harmonisation of tax reliefs across all pensions. In the past this has been facilitated by reducing the maximum pension fund threshold (currently €2m). The indications are that employer contributions could be capped and brought in line with personal contribution limits which could significantly curtail the ability to build a pension pot of €2m going forward. As these changes are set to be introduced in 2022, individuals should review their overall financial goals and consider maximising their pension contributions each year.
For time-poor business owners, finding the opportunity to address these issues is often the biggest challenge. By working with your key advisers in a coordinated way, you can delegate the production of a personal financial plan which overlays a business plan. This strategy should allow you to act as a CEO of your overall wealth to ensure that issues can be discussed and actioned in a timely manner. By adopting this approach, you should be better placed to meet your and your family’s long-term objectives.