Demonstrating value to our clients is crucial.
There have been a number of studies by industry bodies and providers, including Royal London here and Russell Investments here, which quantify the value advice can give to our clients. The results are clear; individuals are better off, net of costs, by taking financial advice.
What about business owners?
Let us consider a case study which shows how much real value can be added by long-term, strategic planning.
Sarah owns a business which has annual profits of £170,000. She is currently drawing a salary of £8,600 and a dividend of £41,400. This takes her up to the higher rate tax threshold. She leaves the remaining profits within the company as she is concerned about paying higher rate tax.
Sarah’s plan is to sell the business in around 10 years but has yet to do any pension funding.
Her financial planner has recommended employing her husband in the business and gifting him half of the shares; he currently works part-time elsewhere and earns £25,000. The recommendation includes an annual £40,000 pension contribution for Sarah and £15,000 for her husband, Colin. In addition, they are to increase the joint dividend to £85,000.
The current and proposed courses of action are below.
| Stay as they are | Take action |
| Salary £8,600 | Salary £8,600 |
| Dividend £41,400 | Joint Dividend £85,000 |
| Pension Contribution £0 | Total Pension Contribution £55,000 |
| Retained Profit £89,334 | Retained Profit £1,184 |
Let us look at the tax position after 10 years:
| Stay as they are | Take action |
| Corporation Tax £306,666 | Corporation Tax £202,160 |
| Personal Tax £26,625 | Combined Personal Tax £104,325 |
| Total Tax £333,291 | Total Tax £306,485 |
Assuming the additional net dividend payment is not spent, it allows them to direct just over £35,000 per annum to their ISAs.
As you can see, they have paid slightly less tax at this point in taking the advice. They also have invested £908,300 into pensions and ISAs which are tax-advantaged wrappers and should provide further tax-efficient growth.
Alongside the taxation position, extracting money into other investment wrappers provides the couple a greater level of diversification. As it stands, their current and future standard of living depends upon the performance of one small company. Using ISAs and Pensions allows them to spread their money across different asset classes (shares, bonds etc), countries and sectors.
Undertaking the plan, over time, could also improve their capital gains tax (CGT) position on the sale of the business after 10 years. Let us also consider the CGT position at year 10 when the business is sold for £2m plus the value of the cash.
Not undertaking the advised planning will result in keeping £893,340 in the business after 10 years, compared to £11,840 after the recommendation to extract these profits. You would expect Business Asset Disposal Relief (previously Entrepreneurs’ Relief) to be denied if no action is taken because of the £893,340 held in cash.
The difference in CGT at the point of disposal for a higher rate taxpayer is outlined below.
Stay as they are
| Asset | Rate | Tax |
| Business – £2m | 20% | £400,000 |
| Business Cash £893,340 | 20% | £178,668 |
| Total | 20% | £578,668 |
In undertaking some planning, the position is changed markedly due to two main factors. Firstly, the value of the cash holding is not sufficiently extensive to deny Business Asset Disposal Relief (BADR). Secondly, Sarah’s husband will be an employee/shareholder and should be able to claim his £1m in BADR.
Take action
| Asset | Rate | Tax |
| Sarah’s Business – £1m | 10% | £100,000 |
| Colin’s Business – £1m | 10% | £100,000 |
| Business Cash – £11,840 | 20% | £2,368 |
| Total | 20% | £203,368 |
The final tax position and net proceeds for Sarah and Colin are quite significant. They demonstrate how much better off they are by seeking professional advice.
Stay as they are – after 10-year exit
| Total Income Tax | £26,624 |
| Total Corporation Tax | £306,666 |
| Total CGT | £578,668 |
| Total Tax | £911,953 |
| Total Net Proceeds | £2,314,672 |
Take action – after 10-year exit
| Total Income Tax | £104,325 |
| Total Corporation Tax | £202,160 |
| Total CGT | £203,368 |
| Total Tax | £509,853 |
| Total Net Proceeds | £2,716,772 |
Because of financial planning for over 10 years, these clients are now £402,100 better off. This is before any investment growth from their ISAs and pensions. This would put them in a much better position to achieve their goals.
