The importance of business succession planning   What happens to a business if its owner or co-owner dies or falls seriously ill? Much will depend on the type of business – sole trader, partnership or limited company – but unless there has been some advance planning, the chances are that there will be disruption, arguments and the strong possibility that all or part of the business will end up in the wrong hands.

So if you’re a business owner, business succession planning and insurance is important. It’s quite simply the process of planning for what you want to happen if you (or your co-owner, if you have one) were to die or fall seriously ill.

The legal position on the death of a business owner will depend on the type of business entity.

When a sole trader dies, their business dies with them, legally speaking. The business’s assets will form part of the sole owner’s estate and pass on to beneficiaries under the terms of their will. If the owner has not made a will, the intestacy rules apply; in effect, the state lays down who the estate should pass to, and normal inheritance tax (IHT) rules apply.

However, the good news is that most trading businesses are not subject to IHT – if you’re unsure about yours, you should certainly take advice. If your business does not enjoy tax relief, the basic requirement is to create a capital sum, preferably outside the estate, in order to minimise IHT.

This could be achieved with the help of a suitable life insurance policy.

A partnership is a business owned by at least two people. Unless there’s some specific provision in the partnership agreement (and very many partnerships have no formal agreement), a partnership ceases when a partner dies. When that happens, the deceased partner’s estate becomes entitled to their share of the business.

This can mean a choice for the surviving partner or partners. They could pay the deceased partner’s estate a sum of money they all agree to be the value of the deceased partner’s share, or carry on in business together with the deceased partner’s spouse or other beneficiary – even if the new partner has little to contribute to the success of the business.

Effective succession planning provides some clarity in the event of death.  A double option agreement ensures the surviving partner(s) has the option to buy the share in the business from the deceased partner’s estate. The deceased partner’s estate can also exercise an option to force the surviving partner to buy. Under an automatic accrual arrangement, the surviving partner(s) inherits the business, but the family receives the proceeds of a life policy.

There may also be a need to insure the lives of all the partners to cover potential liabilities that might arise on their death – perhaps to pay off an overdraft or other creditors.

Limited companies continue after a shareholder’s death, but the basic succession issues are similar to those facing a partnership. The key is to make sure that the shares end up with the surviving shareholders and the deceased shareholder’s family receives some money.

Generally, the deceased shareholder’s beneficiaries will want financial compensation in return for their shares, assuming that they don’t plan to continue in the business; and there may also be the need to pay off creditors on an owner-director’s death.

A double, or cross, option agreement is often used for company shareholder succession planning. If a shareholder dies, their beneficiaries can require the remaining shareholders to buy them out or the remaining shareholders can require the beneficiaries to sell their shares.

To provide the funds, each shareholder should take out an ‘own life’ policy written under a special business trust to benefit the other shareholders.

Of course, it’s not just the death of a business owner that can stop a business. If a business owner suffers a critical illness, such as a heart attack or cancer, it may not be possible to continue in the business either temporarily or permanently.

Expert advice, taken before the event, could have helped in both of these cases. A suitable critical illness insurance policy is probably the best way to provide protection against the financial consequences of having a serious illness. These policies pay a cash lump sum on diagnosis of a specified critical illness or disability.

The policies are normally written in trust for the other business owners, along with an agreement between the business owners about the circumstances in which the share in the business should be transferred.

The death or critical illness of a business owner can lead to unexpected or undesirable consequences for those left behind. Taking the opportunity – well in advance of such an event happening – to plan for such a situation can help crystallise what you want to happen to your business after your death, and to identify how best to ensure that this will actually come about.

A good adviser will start by finding out the most important issues of their business owner clients and, once these have been identified and prioritised, they’ll recommend a suitable way forward.

To receive a complimentary guide covering Wealth Management, Retirement planning or Inheritance Tax planning, produced by St. James’s Place Wealth Management, contact Charlotte Poole-Graham on 07415855071, by email [email protected] or visit www.charlottepoolegraham.co.uk

What is an IFA? Do I need one?

What is an Independent Financial Advisor (IFA)? 

Broadly speaking there are two types of financial advisors, Independent and Restricted.  A common misconception is that ‘Independence’ in this context means that IFAs work alone, however it actually refers to the fact that they are not tied to any particular product provider. IFAs are regulated by the Financial Conduct Authority to advise across all regulated investment and saving products in the UK and as such their advice is impartial. Many IFAs also provide mortgage, annuity, insurance and protection advice. 

Why choose an Independent Financial Advisor? 

 Here’s what I believe a good IFA offers -

· The ongoing support of a person you trust

· A one-stop solution for financial advice across all areas

·  A full financial plan - how much must you save, invest, earn and borrow over your life to achieve your goals?

·  “Whole of market” advice – hunting out the very best investments and products for you, from the thousands available

· Fee-based advice - Advisers are paid by their clients and not by commission, eliminating any hidden incentives and biases

·  Full qualifications and FCA Authorisation – so you can be confident in the quality of advice you receive

·  under the Financial Services Compensation Scheme, just in case you are mis-advised

Why not go to your Bank? 

Financial advice was available from many Banks and Life & Pension firms, however following the Retail Distribution Review which outlawed commission payments many have closed down their advice offering. Those that retain their advice arm should have rigorous processes in place to ensure any advice is “suitable” for the client, and generally do a good job of highlighting to their customers where they might have products with better returns available.

However, bank advisors are normally Restricted, so “tied” to particular product providers, and are rewarded based on which products they sell. So, there is often a conflict of interest between you and them.

Moreover, there is significant variance in the quality of advisor and their suitability for you, and you have limited ability to “pick and choose”.

Why not manage my financial affairs myself online? 

There are several reputable online brokerage sites where you can invest your money yourself, giving access to thousands of different investment instruments. They are generally only suitable for very knowledgeable investors. However, even these investors often turn to their IFA because they don’t find the time to regularly research and manage their investments.

Not optimising your investment portfolio, through limited knowledge or time, can often be more expensive (in terms of returns) than paying the cost of advice.

There are also several comparison sites that allow you to find the best deals available across Savings, Mortgages, Insurance and other product areas.

These product areas are less complex than investments, so it might be more viable to self-manage these affairs. But, it is still best to consult your IFA first, as you may overlook costly issues or fruitful opportunities which your IFA could quickly point out.

Why not use a large Wealth Manager or Private Bank? 

Large Wealth Managers (aka Private Banks) tend to serve “High Net Worth Individuals”, with a minimum investment portfolio size anywhere from £500k to £5m.

Depending on the firm, you may receive the support of a wider team (e.g., a specialist Investment Research team), access to more “institutional-like” products (some Wealth Managers are side-arms of Investment Banks) and be advised by individuals with degree-level investment qualifications. You may also feel more confident with the support of a large brand.

On the down side, Wealth Managers often suffer the same drawbacks as Banks (above) – they can be tied to particular products, have hidden incentives and have varying quality and suitability of advisor.

In short, go local and find a good IFA.

Key questions for Auto Enrolment 

Auto enrolment cannot be ignored; legislation clearly puts the responsibility firmly on the shoulders of employers to operate a Qualifying Scheme correctly for their employees. Failure to comply will result in a series of penalties and fines. So, as an employer (whether a company employing thousands or a sole trader with a single employee), while the resulting actions may be different, the key questions are the same:

·   When do I need to have a Qualifying Scheme in place?

·   Who do I need to enrol?

·    How much will this cost?

·    What choices do I have in selecting a Qualifying Scheme and,

·    Is there anything that can be done to reduce the cost?

When do I need to have a Qualifying Scheme in place?

The ‘staging date,’ is the date by which you must have established your Qualifying Scheme, it varies between October 2012 and April 2017 depending on the number of employees on your payroll as at 1 April 2012. There is an interactive tool available from The Pension Regulator at www.tpr.gov.uk/automatic-enrolment which enables you to find out your staging date.

Who do I need to enrol?

All employees, whether part-time, full-time or contractors age 22 and State Pension Age who earn over the ‘earnings trigger’ in a pay reference period (£192.00 if employees are paid weekly, £833.00 monthly and £10,000 annually for 2014/15) must be auto enrolled. Employees outside these parameters simply need to receive a communication about their rights to join the scheme.

How much will this cost?

The statutory minimum contribution into the scheme will be 8% of an employee’s ‘qualifying earnings’, made up of an employer’s contribution of at least 3%, member’s contribution of 4% and 1% from the Government in the form of tax relief. The ‘qualifying earnings’ will be total earnings falling within an earnings band of £5,772 to £41,865 in 2014/15.

What choices do I have in selecting a Qualifying Scheme?

There are a variety of different pension schemes that can be used for auto enrolment, from defined benefits schemes to personal pension plans. Your ultimate strategy for auto enrolment could be a multi-scheme solution with your workforce segmented into different schemes.

Your solutions will depend on the answers to the following questions:

·         Do you have an existing scheme(s) in place for all your employees? If so, you can continue with this scheme as long as it meets the conditions for auto enrolment

·         Do you only offer pension benefits to some employees, eg senior management? If this is the case you can continue with the scheme for these existing members (as long as it meets the conditions for auto enrolment) however you will need to set up a new scheme for all other employees

It is unlikely that you would want to start a new defined benefit scheme to satisfy your auto enrolment requirements.

Where, on average, contribution levels are likely to exceed £100 per month per employee and you employ more than ten employees, you may want to consider setting up a group personal pension scheme. Alternatively, the offerings from NEST, The People’s Pension or NOW: Pensions may be an appropriate solution. Further information on these solutions is available on request.

Is there anything that can be done to reduce the cost?

While contributions themselves can be based on ‘qualifying earnings’ or ‘pensionable earnings’ (where different minimum contributions may apply), in addition to the level of contributions it will be advisable to consider ease of administration, as this will also be a contributor to cost. The scheme with the lowest contribution levels may substantially increase the administrative burden. Beyond this you could look at salary sacrifice. This is a method of using National Insurance savings to help fund part of the overall contribution for both you and your employees.

Pension reform is coming and, even if auto enrolment may still be some time off for you, for many employers there is much to think about and plan for. The sooner you engage in this process the easier the process and cost will be to bear.

The levels and bases of taxation and reliefs from taxation can change at any time.
The value of any tax relief depends on individual circumstances.

The levels and bases of taxation and reliefs from taxation can change at any time.
The value of any tax relief depends on individual circumstances.

Brave New World

Spring Budgets have had little to promise or offer UK savers and investors in recent years, apart from setting out the depth of the economic challenge ahead for the coalition government. Only last year, the mood was subdued, with talk of a potential triple dip into recession and a long and bumpy road to recovery. The UK’s economy, twelve months on, is undergoing a regeneration and a rate of growth that is now the fastest in the Western world. As Britain looks towards a general election in May 2015, the Budget contained far-reaching changes for its savers and investors.

Chancellor George Osborne, in his address on 19 March, said the Budget rewarded “the makers, the doers and the savers” in Britain. And the new pension and tax-efficient saving arrangements certainly offer radical reform of the UK’s personal finance landscape and welcome breaks for savers and investors after four years of austerity. A significant change in pension arrangements has lifted restrictions on access to pension pots and made it more attractive for individuals to invest for their retirement through pensions. And the reform of Individual Savings Accounts (ISAs) brings a very welcome increase in the annual allowance to £15,000 from July this year.

The boost that the 2014 Budget has given to investors, however, comes amid continued austerity, with the government only halfway through the fiscal consolidation it embarked on in 2010. Public borrowing levels still remain at £108 billion for 2014 (www.parliament.uk, 21/3/14). When the coalition came to power in 2010, Osborne had planned to balance the budget by 2016. Instead, the aim is 2019 (www.gov.uk, 19/3/14). The recovery also remains prone to wider global risks, whether from China’s economy or Russian military action. Meanwhile, there are widespread concerns that the recovery has been driven by consumers running down their savings, while households are squeezed by living costs as prices rise faster than earnings.

But the good news for business, markets and households is that the UK economic recovery has entrenched. In March, the Office for Budget Responsibility (OBR) revised up its forecast for the pace of the recovery in 2014 to 2.7%, from 1.8% a year ago (when its estimate for 2013 growth was a mere 0.6%). The OBR also expects earnings will grow by 2.5% this year, and inflation by 1.9%. Osborne, in these more secure conditions, packed his Budget with a broad range of pre-election giveaways, including a reduction in the savings tax rate and an increase in the personal tax-free allowance to £10,500 for 2015/16. The Budget also restated that the Inheritance Tax threshold will remain at £325,000 until April 2018.

Investors have done well as growing economic confidence, loose monetary policy and low-interest rates have buoyed equities in the leading financial centres. Although 2014 is unlikely to match last year’s market advances, market returns are expected to reflect the improvement in the global economy and corporate and consumer confidence. In this upbeat environment, the Budget’s ISA allowance increase holds out further investment opportunity, particularly for those that want an alternative to the near-zero returns on offer from cash.

The Budget’s relaxation of ISA rules to allow any combination of stocks and shares and cash rightly gives investors more flexibility to manage their valuable allowance to suit their attitude to risk and their needs. However, the Bank of England Governor, Mark Carney, remains adamant that the base rate will remain at a record 0.5% low while the economy recovers; and is widely expected to be held at this level until mid-2015 (www.bbc.co.uk, 20/2/14). It seems unlikely that the government would welcome a rise in interest rates just before it goes to the polls.

Osborne’s move to increase the annual ISA allowance to £15,000 was designed to encourage Britain to set aside more for the future. With mild inflation still eroding the value of cash, the hope must be that investors make the most of the long-term benefits provided by this even more valuable and flexible opportunity.

Osborne’s decision to champion investor choice has also underpinned the more flexible new pension regime. Perhaps most radically, he has made proposals to free up access to pension pots and change the rules for annuities from April 2015, as well as introducing a new pensioner bond. The proposal to allow anyone over the age of 55 to take their entire pension pot as a lump sum (albeit with 25% tax-free and the remaining amount liable to Income Tax) is a radical innovation that allows individuals to invest, save, spend or give as they see fit. As an interim measure, the guaranteed income required before qualification for flexible drawdown has been cut to £12,000, from £20,000, and this retrospective move will allow anyone in drawdown to benefit from the increased flexibility.

The more liberal regime, too, complements the traditional annuity route and the security it offers for those who want a guaranteed income over their retirement lifetime. Annuity investors will benefit when interest rates start to rise; while drawdown investors can encounter problems in the face of stock market volatility. The new pension regime admirably hands more control to individuals over their long-term financial plans. But, as with all financial planning, each person’s needs and appetite for risk or security are distinct. Retirement planning requires expert, not off-the-shelf, solutions. Osborne’s brave new world for savers and investors creates further nuances and complexities that make wealth management advice as important as ever.

The value of an investment  will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.  Equities do not provide the security of capital associated with a deposit account or a Cash ISA.

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstance

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning contact Charlotte Poole-Graham on 07415855071, by email [email protected]  or visit www.charlottepoolegraham.co.uk     

Make the right ISA choice

Individual Savings Accounts (ISAs) remain an important building block in helping create capital and income for the future and since their launch in 1999, when they replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), the popular personal finance vehicle has gone some way to address the shortcomings in the UK’s savings culture.

And without doubt, ISAs have proved a success story, with more than £443 billion invested over the last 15 years, of which a record £57 billion was subscribed in the last tax year (source: HMRC, September 2013). The opportunity to invest in a tax-efficient way has made ISAs the cornerstone of many investment strategies; both savers and investors are understandably enticed by the ability to achieve tax-free interest and no further tax on income or capital gains.

There are two types of ISA: Cash ISAs are savings accounts where the interest is paid tax-free, and Stocks & Shares ISAs which, as the name suggests, allow investment into a wider range of stock market and other financial instruments. However, there are restrictions on how much can be invested in each type. The full annual allowance of £11,520 (2013/14) can be invested in a Stocks & Shares ISA, but only half - £5,760 - can be saved in a Cash ISA (although the balance of the allowance can still be invested in a Stocks & Shares version). An inflation-linked increase will see the allowance rise to £11,880 in the new tax year.

An individual or couple who invested the full ISA allowance each year could by now have sheltered funds of £124,080 and £248,160 respectively from any further tax liability, according to HMRC.

But there is a sting in the tail. The squeeze on savers from record-low interest rates is also being felt by those with Cash ISAs. Figures from the Bank of England in December showed that the average Cash ISA deposit rate is just 0.67%.

The reality is that the tax benefits provided by ISAs are best maximised by investing for the long term in assets capable of achieving capital growth and rising income. The likelihood is that interest rates will remain low for a number of years to come and, regrettably, savers cannot even be sure that their Cash ISA account is achieving a better rate than a standard deposit account. Against that backdrop, whilst cash is certainly the right home for money that might be needed in the short term, ISA allowances might be better utilised by investing in a diversified portfolio of assets that have the scope to deliver higher levels of income and long-term capital gains and, in doing so, make the most of the tax freedom on returns. Of course, investors need to bear in mind that the value of a Stocks & Shares ISA may fall as well as rise and it does not provide the security of capital associated with a Cash ISA.

As well as considering the best use of this and future years’ ISA allowances, those who have already built up significant ISA funds might be able to improve the income and capital returns on offer. All too often, people do not review their ISA portfolio strategy frequently enough. How are the investment managers performing? Is the asset mix, geographic spread or fund choice still right for them? Can they improve the income-generating potential of their ISA portfolio? Are they happy with the service they’re receiving?

A thorough review of an ISA portfolio by an experienced wealth manager can ensure that it is appropriately structured and diversified to help achieve immediate or future financial goals. ISAs should be a fundamental element of financial planning, but it is also important to consider them in the context of an overall investment strategy and to ensure that an ISA portfolio can be adjusted easily to cater for changing needs.

As a final thought, parents, grandparents, and indeed anyone who might want to help a child build capital for his or her future, should not overlook Junior ISAs, which were introduced in November 2011 to give under-18s a similar tax-efficient savings opportunity. The limit for investment in this tax year is £3,600; but given the future financial challenges faced by the children of today, any help will provide them with a valued head start.

Remember that the favourable tax treatment given to ISAs is subject to changes in legislation and may not necessarily be maintained in future.

To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, produced by St. James’s Place Wealth Management, contact Charlotte Poole-Graham of St. James’s Place Wealth Management on 07415855071 or email [email protected]