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Employee Ownership Trusts

Introduced by the Government in 2014 to expand employee share participation, Employee Ownership Trusts (often referred to EOT’s) have become one of the most popular options for owners to secure a tax efficient exit from their business.

Properly structured, the sale of an individual’s shares in a trading company will be free of capital gains tax. In addition, the employees of the company can benefit from a tax-free annual bonus of up to £3,600.

As with any generous tax reliefs there are qualifying conditions that need to be met (by both the EOT and the company) in order to benefit from these. These conditions must also continue to be met on an ongoing basis in order to prevent the tax reliefs from being withdrawn.

One of the fundamental conditions that needs to be met is the “equality and participation test” which can often be misunderstood and if breached can be costly.

Freestone Jacobs have extensive experience in establishing EOT’s for all sizes of companies and we can also act as an independent Trustee to ensure that the qualifying conditions continue to be met.

For more information please contact us.

Enterprise Investment Scheme and Seed Enterprise Investment Scheme (SEIS)

EIS and SEIS provide generous tax reliefs for investors including income tax relief for the initial investment (30 percent for EIS investments and 50 percent for SEIS investments) and capital gains tax free disposals of the investment.

These tax reliefs are designed make it easier for companies to raise equity capital.  However as is often the case when tax reliefs are available, they come with strict conditions.

In order for the investor to benefit from the tax benefits both the company and the investor are required to meet certain conditions at the time of the investment – many of which must continue to be met for a three year period starting from the date of the investment. The EIS and SEIS legislation can be a minefield and often companies will either fail to meet these conditions or unwittingly breach them during the three year qualifying period. This will result in the tax relief being either denied or withdrawn.

Freestone Jacobs can advise both companies and investors on any proposed EIS or SEIS investment to ensure that tax relief will be due.  We can draft and submit an advance assurance request to HM Revenue and Customs (HMRC) which will provide investors with confidence that relief will be due on their investment.  Once the investment has been made, Freestone Jacobs can also submit the company’s claim for relief which, once approved by HMRC, will enable the company to formally issue tax certificates to the investors so that they may claim the tax relief due.

For more information please contact us.

Enterprise Management Incentive Scheme (EMI)

The Enterprise Management Incentive scheme is a share option scheme which is approved by HM Revenue and Customs and enables share options to be granted to employees at the company’s discretion.

Each employee who participates in the EMI scheme must work at least 25 hours per week or spend at least 75 percent of their working time actually working for the company.  Subject to this, options can be granted to selected employees and, when exercised, enable the employees to acquire shares in the company at a preset price, without giving rise to any tax charges.  The preset price must be at least equal to the value of the shares at the time the options are granted and this may be substantially less than the value of the shares when the options are exercised.

It is common practice for performance conditions to be attached to the options before they may be exercised and these can be tailored to each individual employee.  The options must be capable of being exercised within ten years.

In order for an EMI scheme to be established, a valuation of the shares to be issued should be agreed with HM Revenue and Customs and this will form part of the formal documentation.  It should be noted that the maximum value of unexercised options that can be held by one employee is £250,000 and individuals may also not have an interest exceeding 30 percent of the company under the rules of the scheme.

There are a number of other conditions which need to be satisfied by the company and the employees.  However, if these are met and the terms for granting and exercising options are carefully tailored to the business’ needs then the EMI scheme is a tax efficient way to motivate key employees and pass ownership of the company to them in the future.

For more information please contact us.

Family Investment Companies

Family investment companies (often abbreviated to “FIC”) have become a popular inheritance tax planning tool in recent years. These normally have two classes of shares often called “frozen shares” and “growth shares”.  Generally a family’s older generation can look to establish the FIC whereby the growth shares are gifted to the younger generation and whilst the frozen shares are retained.

An interest free loan is then made available to the FIC to invest meaning that any future growth in value of those investments will be reflected in the shares held by the younger generation.

In many cases it may be possible to gift the growth shares to a trust which can further increase the inheritance tax benefits.

For more information please contact us.

Restructuring Your Company

Company restructures can take many different forms and will often depend on the reason for the restructure.  Arrangements can include:

  1. Purchase of own shares
  2. Statutory demergers
  3. Non statutory demergers
  4. Capital reductions
  5. Establishing holding companies
  6. Management buyout special purpose vehicles,

There are many reasons why shareholders might want to restructure their companies such as (but not limited to):

  1. Restructuring the assets of a business prior to a sale, for example where a vendor wishes to buy a business but not the trading premises.
  2. Splitting two or more distinct business units from each other to enable each of them to be managed more effectively.
  3. The retirement of older shareholders as part of a management buyout.
  4. Separating valuable assets from the trading activities of the company.
  5. Tax efficient succession planning for family companies.

The restructuring of a company requires consideration of a number of taxes including capital gains tax, income tax, VAT, inheritance tax, stamp duty and stamp duty land tax and, if the proper advice is not obtained, significant tax liabilities can arise. In many cases it is possible to secure advance clearances from HM Revenue and Customs to confirm that statutory reliefs from the above taxes are available.  Freestone Jacobs have over thirty years of experience advising owner managed businesses on how to restructure their business and minimise any associated tax liabilities.

For more information please contact us.





Capital Gains Tax

The main rate of capital gains tax is 10 percent for basic rate taxpayers and 20 percent for higher rate taxpayers.  In the event that the gain covers both tax bands then a combination of the two rates will be payable accordingly.  These rates increase to 18 percent and 24 percent respectively for gains arising on the sale of residential properties (excluding main residence).

A valuable relief known as business asset disposal relief can apply to the gain arising on the sale of certain business assets whereby the maximum rate of capital gains tax will be 10 percent (subject to a limit of £1 million lifetime gains).

Generally speaking, business asset disposal relief can apply to the sale of an interest in a sole trader or partnership business, the disposal of shares in an individual’s personal company and the sale of assets used in any of these entities following their disposal of cessation.

In general terms, a company is an individual’s personal company if that person owns over 5 percent of the share capital and voting rights and is an officer or employee of the company – these conditions must both be met for a period of at least two years prior to the sale.

There are other conditions that may need to be satisfied and a number of different arrangements that may be made to protect and/or maximise an individual’s entitlement to this valuable relief.  Therefore, it is important to review the current ownership of business assets and also future plans to ensure that the rate of tax payable on exit and/or disposal is kept to a minimum.

A common pitfall is that capital gains tax can apply to gifts of assets or transactions undertaken on a non arm’s length basis.  The level of consideration used to calculate the gain is based upon the asset’s market value and therefore a simple gift of an asset such as a property can be very costly.  There can be ways to mitigate the impact of this in certain circumstances and therefore advice should be sought at an early stage.

Ordinarily, capital gains will be taxed via an individual’s self assessment tax return, however gains realised on the disposal of a residential property must be reported initially via an on-line capital gains tax return and this must be submitted within a set time frame after completion (currently 60 days).

The above is a very short synopsis of some of the more common areas of capital gains tax but there are many different provisions and reliefs available depending upon the assets and specific situations so it is important to engage professional advice before undertaking any substantial disposals.

For more information please contact us.

COP 8 & COP 9 Tax Investigations

HM Revenue and Customs may issue a COP 9 notice if they suspect a taxpayer of serious tax fraud.  These investigations are generally opened if HM Revenue and Customs expect to recover taxes in excess of £75,000 and they are able to go back as far as 20 years to identify unpaid tax.

Under COP 9 procedures, individuals are given immunity from prosecution if they provide full and complete disclosure of all irregularities in their personal tax affairs via the Contractual Disclosure Facility.  This is a formal procedure that must meet specified criteria.

An investigation can be carried out under COP 8 in all cases involving possible serious tax fraud or avoidance where the procedures in COP 9 are not used.  HM Revenue and Customs do not generally use the COP 8 procedure if they are considering a criminal investigation, however, if evidence of suspected serious fraud is found during their investigations then they may take action under COP 9 or commence criminal proceedings.

If a taxpayer is in receipt of either a COP 8 or a COP 9 notice then they should seek professional assistance as a matter of urgency to ensure that any formal procedures are followed and appropriate representations are made.

For more information please contact us.

Due Diligence

When the shares in a company are acquired, the new owner acquires the company in its entirety including its history.  As such, there is a greater commercial risk compared to simply acquiring an asset as the value of the company in the future can be seriously affected by events or liabilities that have occurred in the past.

In view of the above, a greater level of work is recommended prior to the acquisition to ensure that the company’s affairs are in order and to highlight past events and risks so that appropriate protection is offered to the purchaser.

A common area of risk lies within the company’s tax affairs e.g. corporation tax, VAT, employer taxes etc.  It is important for a buyer and their advisers to consider the areas of risk for that particular company so that they are aware of potential tax liabilities that may arise after the purchase but which relate to past events.  Areas of concern will vary from company to company and therefore a thorough review should be undertaken to highlight these and to enable the seller to address any relevant points.

Similarly, a seller may be required to provide warranties against certain potential liabilities that could arise or alternatively disclosures regarding possible issues.  These need to be considered with the company’s affairs to ensure that the seller is protected from unwanted claims.

Freestone Jacobs has significant experience advising both buyers and sellers and assisting them through the due diligence and disclosure process.

For more information please contact us.

Inheritance Tax Planning

Generally speaking inheritance tax applies to the estate of a person who has died.  Subject to some exceptions, there is no liability to pay if an estate has a value of £325,000 (the ‘nil rate band’) or if the estate or the chargeable assets in excess of the nil rate band are left to the deceased’s spouse or civil partner or to charity.

To the extent that the nil rate band is not fully utilised by the deceased then the unused proportion will be available to their surviving spouse or civil partner upon their subsequent death.

Not all assets held in an estate are chargeable to inheritance tax and, in particular certain business assets, such as shares in an unquoted trading company, and agricultural assets will be wholly or substantially exempt from inheritance tax.  The assets qualifying for exemption are specifically defined within the tax legislation and generally must be owned by the deceased for a period of two years prior to death to qualify for the relief.

Inheritance tax is payable at a rate of 40 percent in respect of chargeable assets held in the deceased’s estate in excess of the nil rate band available.  As such it can be a very costly tax.

An increased nil rate band which can effectively increase the overall nil rate band to £1 million per couple may be available in respect of estates containing a family home.  As with many reliefs this is subject to a number of strict conditions.

It is possible to undertake a number of lifetime inheritance tax planning strategies to try to reduce an individual’s death estate and pass assets to beneficiaries without incurring a tax charge.  However, any strategies will need to take capital gains tax into account as well as the individual’s living requirements.

A series of small lifetime exemptions can be applied in a concentrated manner to secure significant savings as part of a long term strategy whilst the use of a trust can also often be effective.

Freestone Jacobs are able to assist in reviewing will arrangements, lifetime inheritance tax planning and maximising the inheritance tax reliefs available on certain assets to tailor a short or long term plan to meet specific objectives.

For more information please contact us.

Management Buy Out (MBO)

An MBO arrangement is a common vehicle used to pass a company over to its management team or, quite often, other family members working within the business.

In general terms, an MBO arrangement will involve the incorporation of a new company as a vehicle to acquire shares from the exiting shareholder.  Depending upon the exact circumstances and requirements, the exiting shareholder can hold shares in the new company and this can quite often be useful during a transitional period.

The disposal of shares by the shareholder to the new company will be a disposal for capital gains tax purposes.  If structured carefully, this can secure business asset disposal relief (and thus a maximum tax rate of 10 percent on gains up to £1 million) even if the proceeds are payable over a period of time.

The benefit of the arrangement for the incoming shareholders is that they will not have to fund the purchase of shares personally from taxed income or secure personal finance.

The new company will generally own all of the shares in the trading company and therefore dividends can be paid to it without any tax implications.  These can then be applied to pay the sale consideration to the exiting shareholder.

There are a number of factors to take into account in order to devise the most appropriate structure for the companies moving forward, the sale of shares and for the various individuals’ future tax positions.

For more information please contact us.

Patent Box

Patent Box is a valuable tax incentive which is intended to increase innovation by encouraging companies to turn their research and development into commercial products.  It achieves this by applying a reduced corporation tax rate of 10 per cent to profits that relate directly to patents that the company have developed.

Patent Box has a natural relationship with research and development tax reliefs allowing for valuable tax reliefs at both the development and commercial exploitation of innovation projects.

The benefit of the Patent Box regime can only be formally claimed once a UK or European patent has been granted, however it can apply to profits arising from the date that the patent is pending, subject to appropriate steps being taken.

For more information please contact us.

Personal tax planning

Our experience is that any tax planning must be tailored to the individual circumstances of the client and that ‘one size fits all’ tax planning may not meet their particular needs. This is especially true for those with complex tax affairs but can be equally applicable for clients with less complex affairs.

That is why at Freestone Jacobs we believe that before providing tax advice to any clients we should spend time with that client to build a full picture their personal financial and family position and to discuss their future plans. This enables us to work together with our clients to build up a long term tax strategy for them, their family and (if appropriate) their business interests.

We also regularly review the advice that has been provided to our clients to ensure that it remains valid in relation to changes in both tax legislation and the personal and financial circumstances of our client. If necessary the original advice provided can then be adjusted as appropriate.

Purchase Of Own Shares

A company may purchase its own shares from an individual shareholder whereby they are effectively cancelled so that any remaining shareholders’ interests are increased.

Regardless of the applicable tax treatment, there are a number of company law requirements which need to be met in order for a purchase of own shares to be undertaken.  If these formal conditions are not met then the arrangement could be invalidated.

For tax purposes, a purchase of own shares by a company will ordinarily form an income distribution in the hands of the shareholder whereby it will be subject to income tax and taxed in a very similar way to a dividend.  However, if certain formal conditions are met then the purchase of own shares may be treated as a capital distribution. In these circumstances, the disposing shareholder will be subject to capital gains tax and can claim business asset disposal relief.  If available, this may give rise to a maximum capital gains tax charge of ten percent (subject to the £1 million lifetime allowance).

It is possible to apply to HM Revenue and Customs for advance statutory clearance that the necessary conditions have been met for the capital treatment to apply.

If effective, the above can be a very efficient strategy for the remaining shareholder(s) to increase their interest in the company without funding this personally whilst enabling the departing shareholder to secure a low capital gains tax charge on his disposal.

The company will incur a stamp duty charge at a rate of ½ percent of the consideration paid.

Freestone Jacobs has vast experience in advising shareholders of the best option for their particular circumstances and then implementing the most appropriate strategy to achieve their objectives.  For more information please contact us.

Research and Development Tax Relief

Research and development (R&D) tax relief is a corporation tax relief that is available to companies who undertake research and development work on projects seeking to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.

The level of relief and type of claim possible depend upon whether the claimant company is small or medium (SME) or a large company.

Firstly in order to be considered as a qualifying R&D project any activity must meet the definitions set out by the Department for Business, Innovation and Skills. If the necessary criteria are met enhanced R&D tax relief can be claimed on revenue expenditure such as staff costs, subcontractor costs and consumable. If only part of these relate to qualifying R&D activities then tax relief can only be claimed for an appropriate proportion of the relevant cost.

SME relief (accounting periods ending before 1st April 2024)

If a company is an SME then the tax relief on allowable R&D costs is currently 186 percent which means that for every £100 of qualifying costs, the company can claim an additional expense of £86 on top of the £100 spent.  For companies with sufficient profits, this will simply be deducted against the taxable profits.

Alternatively, if the company makes a loss it can choose to make the deduction above and carry forward the resulting loss or it can instead elect to receive R&D tax credits.  This will give rise to an actual tax repayment although the relief will be given at a rate of 10 percent of the R&D costs and uplift rather than at the full rate of corporation tax that would otherwise be available in the future if the company becomes profitable.

Large company relief (accounting periods ending before 1st April 2024)

For large companies, the Research and Development Expenditure Credit Scheme (RDEC) can provide tax relief between 14.7 percent and 16.2 percent of the amount of qualifying R&D expenditure depending upon the company’s applicable rate of corporation tax.

Merged relief (accounting periods commencing on or after 1st April 2024)

This relief is introduced for accounting periods commencing on or after 1st April 2024 is based largely on the above RDEC rules but includes a number of beneficial elements of the SME relief.

Under the merged scheme, if a company has sufficient profits then tax relief between 15 percent and 16.2 percent of the amount of qualifying R&D expenditure is available depending upon the company’s applicable rate of corporation tax.

Alternatively, as above, if the company makes a loss it can choose to make the deduction above and carry forward the resulting loss or it can instead elect to receive a tax repayment with relief given at an effective rate of 8.7 percent of the R&D costs and uplift.

Research and development tax relief can be extremely valuable for any size company and therefore great care should be taken to review all projects and costs to maximise the claim.  Companies are required to inform HMRC of their intention to make a claim within six months after the end of the accounting period to which it relates and this notification must be submitted prior to the claim itself so it is important to take advice at a timely stage.

For more information please contact us.

Selling Your Company

The sale of an owner managed business is often the result of many years of hard work by the director shareholders so they will want to ensure that they do not pay more tax on the sale than is necessary.  This will often mean that advance planning is required to minimise any problems that might otherwise arise during the sale process and can commonly involve restructuring the company prior to the proposed sale.

As well as reviewing the share structure to ensure that as far as possible all shareholders can maximise their entitlement to business asset disposal relief, it will often be necessary to carefully review the share sale agreement to ensure that higher rates of capital gains tax (or even income tax) do not become payable.

The shareholders will also be required to provide numerous warranties and indemnities in respect of the company’s accounting and tax affairs.

Freestone Jacobs can provide top quality advice in respect of all tax aspects of company sales and will often start working with clients one to two years before a proposed sale to ensure that the tax liabilities of the company and its shareholders are mitigated as far as possible within the confines of the tax legislation.

For more information please contact us.

Share Valuations

Valuing shares in a private limited company is a very subjective exercise and there are a number of different methods that may be applied.

In many cases, it is most appropriate to adopt a valuation based on the earning ability of the company. The valuer will normally seek to arrive at a maintainable earnings before interest, tax, depreciation and amortisation (“EBITDA”) as the starting point.  It is often necessary to then adjust the actual accounting entries to take account of any non-arms length transactions or significant one off transactions.  A common example of a non-arms length transaction that will require an adjustment are transactions with shareholding directors, for example if a shareholding director does not take a salary choosing instead to take dividends or merely leave funds within the business.

Having arrived at a hypothetical maintainable EBITDA an appropriate multiplier will be applied to arrive at an enterprise value for the company’s business. This multiplier will depend upon the company’s profile and other factors.

There are alternative bases that can be used to value a company including the net asset value of the company or a dividend yield basis of valuation.

Other factors to take into accounts when valuing a company or shareholding is the ‘free cash’ in the company and the level of shareholding being valued.

If you require help with the valuation of a company or a specific shareholding, please contact us.

Succession Planning

A key concern for many business owners is succession planning for when they wish to partially or fully withdraw from their business.

The options available will often depend upon a number of factors such as the availability of a third party buyer, the business’ infrastructure and the management team.

Third Party Sale

Arguably the simplest solution will be to sell the business to a third party buyer.  For company owners this will ideally involve the sale of shares giving rise to a maximum capital gains tax charge of 10 percent if business asset disposal relief is available (subject to the £1 million lifetime allowance for gains).

Quite often the consideration may be paid over a period of time or be dependent upon the business’ future performance but planning may be undertaken to ensure that the exact structure is tax efficient for the seller.

MBO Arrangement

An alternative to the above will often arise if the business has a capable management team to whom the business may be passed. This is often called a Management Buy Out (MBO) and an effective arrangement may be established to enable the management team to acquire the business.  A structure can be devised and tailored for different scenarios to enable the sale consideration to be paid to the exiting business owner tax efficiently, often without the need for the MBO team to raise all of the required finance and to then repay this from their personal taxed income.

There are a number of aspects to be considered by both parties including establishing an appropriate vehicle, structuring the consideration and payment terms effectively and liaising with HM Revenue and Customs as appropriate.

Purchase Of Own Shares

A company may purchase its own shares from an individual shareholder whereby they are effectively cancelled so that any remaining shareholders’ interests are increased.  As such, this can be an effective strategy if the company has at least one other shareholder who will continue within the business.

Ordinarily a purchase of own shares by a company will be subject to income tax and taxed in a very similar way to a dividend.  However, subject to certain conditions, the purchase by the company may be treated as a capital distribution. In these circumstances, the departing shareholder will be subject to capital gains tax in respect of the distribution and can claim business asset disposal relief as appropriate.  As with a third party sale detailed above, this may give rise to a maximum capital gains tax charge of ten percent.

As such, the above can be very efficient for the remaining shareholder(s) as the company funds the purchase whilst the departing shareholder will secure a low capital gains tax charge on his disposal.

Freestone Jacobs has vast experience in advising exiting shareholders of the best option for their particular circumstances and then implementing the most appropriate strategy to secure their exit tax efficiently.  For more information please contact us.

Tax Enquiries

HM Revenue and Customs may open a tax enquiry for a number of reasons including:

  • To review an irregularity in a tax return such as employment income which differs to their employer’s records
  • To review a number of unusual entries such as substantially increased income and/or expenses.
  • To query the technical treatment applied to certain entries.
  • The individual/company is simply selected at random.

Formal procedures must be followed by HM Revenue and Customs to open an enquiry into an individual’s or a company’s tax return and, as part of these, the officer dealing with the enquiry will specify the areas of the returns being reviewed and detail their initial queries.

It is important to consider the information required and address the various queries carefully and therefore professional assistance should be sought.  Freestone Jacobs have extensive experience in dealing with enquiries large and small and closing these with the lowest possible tax adjustments (if any at all).

For more information please contact us.

Trust Taxes

The use of a trust can be a useful asset protection or tax planning vehicle.  However, trusts are subject to separate tax rules compared to individuals and therefore these need to be considered to ensure that the operation of the trust is fully compliant.

The most common type of trust is a discretionary trust and we have detailed the main tax considerations below.  However different types of trust may have different tax implications and these should be considered at an early stage.

Income Tax For Discretionary Trusts

The trustees are responsible for completing and submitting a self assessment tax return each year detailing the trust’s taxable income.

The rules for calculating the trustees’ tax liability can be complex.  As for individuals, different rates of income tax apply to different types of income. The standard basic rate of income tax applies to income below £1,000 (exact rate depends upon the type of income) whilst the highest rate of income tax applies to taxable income above £1,000.

In addition to the above, careful consideration needs to be given to the level of income distributed to beneficiaries as this can sometimes incur an additional liability, albeit that this can often be reclaimed by the beneficiaries.

Capital Gains Tax For Discretionary Trusts 

Similar to individuals, trustees are subject to capital gains tax and a number of reliefs can be available such as business asset disposal relief in certain situations.

The trustees are entitled to a tax-free allowance each year which is half of the allowance applicable to individuals.  The highest rates of capital gains tax are payable by trustees for gains on residential property and all other gains.

Inheritance Tax For Discretionary Trusts

Trustees of discretionary trusts may have a liability to inheritance tax or to complete an inheritance tax return in a number of different circumstances.  The main occurrences are when assets are transferred out of the trust and when the trust reaches a ten year anniversary of its establishment.

The calculation of the inheritance tax (if any) arising can be complex and it is important to plan for these events to ensure that the tax implications and reporting requirements are understood.

For more information please contact us.

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