Tax savings become more important in credit crunch!

As many lenders become reluctant to lend in the current climate, and business owners become more concerned with their cash position, tax savings can provide a valuable source of funds to maintain the business.

With careful tax planning significant tax savings can often be made. Tax planning is all about understanding business and personal taxes and indentifying ways to minimise them. We focus on understanding the complex tax laws in order to identify tax saving opportunities for you.

Entrepreneur's relief saves the day! Or does it?

Fundamental changes to Capital Gains Tax rules came in from 6^th April 2008, bringing a dark day for many business owners. Indexation and Taper Relief disappeared leaving increased Capital Gains Tax bills for many individuals. The biggest losers were to be business owners who had previously enjoyed an effective 10% tax rate on the sale of business interests or business assets in the past.

Many business owners have been saved by a white knight in the form of "Entrepreneur's Relief", reducing their tax bills on business disposals from 18% to an effective 10%. This makes Entrepreneur's Relief one of the most important relief's for business owners today.

The relief gives a £1 million lifetime allowance to each individual actively involved in a business. An individual can make a number of claims for the relief, up to the lifetime limit of £1 million in gains. There is no minimum age limit for the relief, but certain conditions will need to be met.

The problem!

The biggest problem right now is that many people believe that they will be fully entitled to the relief, when in fact they won't.

For example many private company shareholders believe that they will be entitled to the relief when they sell their shares. However if they own less than 5% of the company or are neither a director nor employee then they will not be entitled to the relief.

Many private company shareholders who have retained the business premises outside the company will often have charged rent to the company for using the premises. Prior to 6^th April 2008 this was sound planning and provided an opportunity to save national insurance on monies taken from a company. However charging rent will seriously jeopardise Entrepreneur's Relief.

A simple answer would be to take a salary instead of the rent, however national insurance will be chargeable on the additional salary and should a personal loan have been taken out to purchase the property, then tax relief will no longer be available.

Partnerships or sole traders looking to sell an asset used in the business, such as land used by a farmer, would previously have enjoyed the effective 10% capital gains tax prior to 6^th April 2008. This is no longer the case and many assets used in the business, such as farmland, are likely to be liable to capital gains tax at 18%, almost double what it was.

The good news is that for those currently not eligible for the Relief, there may be action that can be taken to rectify this.

Tip: You may wish to consider whether family members should have an interest in the business. The potential tax savings for each involved could be at least £80,000 by utilising Entrepreneur's Relief, let alone possible savings on extracting profits. However extreme care is required and advice should be taken.

Tip: If you are looking to cease trading then providing certain conditions are met, you may be able to sell the business assets after ceasing and enjoy Entrepreneur's Relief, leaving you with an effective 10% tax bill on the gains.