Wealth Planning for Business Owners
Running a business can be all-consuming. It’s easy to delay taking the steps necessary to look after your own wealth while you’re busy scaling up your business.
Business protection insurance, a pension plan and a strategy for succession should all be considered to keep your financial ambitions on course – especially as business owners are more inclined than most to make financial decisions based on emotions, according to recent Kleinwort Hambros research(1).
More than a third of business owners thought their financial decisions were guided by emotions compared with 15 per cent of non-business owners.
There is a solution. A wealth planner can help ensure your financial decisions are driven by facts, not emotions, and that you do what’s needed to reach your financial goals.
Andrew Dixon, Head of UK & International Wealth Planning at Kleinwort Hambros, says: “Most business owners are thinking too much about their business. So we’re here to get them to do what they should be doing to secure the business, make sure they diversify, make sure they take the opportunities available to them as business owners.”
One advantage of being a business owner is flexibility over how you pay yourself, Dixon says.
Owners can take profits from the business using the most tax-efficient method, whether that’s a salary, dividend or contribution to a pension fund.
The upside of investing profits in a pension scheme is that you don’t pay tax on it immediately; you can invest it and watch the sum grow tax-free, Dixon says.
Pension schemes for business owners
Some owners rely on the eventual sale of the business for their pension. But as the latest financial crisis has taught us, you should always have a plan B. And it is worth making the most of the tax benefits pensions offer.
Many owners set up a small self-administered pension scheme (SSAS). Businesses receive corporate tax reductions on the cost of running such schemes. Members have control and flexibility over what they invest in, Dixon says. For example, SSASs are often used to buy a business’s premises, because it is more tax efficient to own them through a pension scheme.
These schemes generally have no more than 11 members(2) and are usually set up by directors to fund their own retirement. They are open to family members, even if they don’t work for the business, and can be part of a succession plan, Dixon says.
How do I future-proof my business?
If you run a company with a business partner, it’s wise to have plans in case one of you dies. The deceased person may drive the profits or have knowledge and experience vital to continued success.
Key person insurance can protect your business by paying out a lump sum if the named individual dies. Some providers also offer this for critical illness.
Dixons says: “You want to be able to generate liquidity that will see the business through for a period of time so it doesn’t collapse.”
You also need to think about what happens to the ownership if your business partner dies. Dixon explains that shares often pass to a spouse who may know little about the business.
“What you want to do is give the surviving business owner the liquidity to buy out the spouse,” he says.
Life insurance that pays out on the death of an owner is one way to ensure cash is cash available to buy out a surviving spouse.
When should I pass on my business or retire?
When you stop working will probably depend on what type of business owner you are. There are people who devote their working life to growing and selling one business, as well as family business owners and serial entrepreneurs.
If you have always intended to sell your business and use the proceeds as your pension, you will probably do this in your 50s or 60s. But you have to be certain you will make enough from the sale to live off. A wealth planner can help you work out how much income the lump sum will generate and how much you will need.
Serial entrepreneurs, on the other hand, may never want to stop working. They often look at a five-to seven-year time horizon for selling a business and then start something new.
Dixon says it can be hard to persuade entrepreneurs to use pensions and ISAs. They can have a higher expectation of returns from passive income, probably because of the returns they’ve generated from their own businesses.
“There’s probably an education process to show them the merits of compounded long-term returns and passive income,” he says.
If your family has owned a business for generations and your children expect to take the reins, the timing of succession will often depend on when they are ready. Will they join the business at 18, go to university or work elsewhere first?
Things can become complicated if one child takes on the business and the others don’t want to become involved. From a succession point of view, it can then be difficult to hand down equal shares if the business represents most of your wealth.
How do I gift equity in a business to my children?
If you intend to pass your business to your children, you can simply transfer share ownership to them. You will probably have to pay capital gains tax, but for some this will be the easiest way to hand on a share. This could be if the children already work for the company and you want them to receive more than a salary.
Dixon says there are ways to avoid an immediate tax bill. For example, you can put the equity into a trust and hold over any capital gains. The new owners, the trust beneficiaries, will have to pay capital gains tax when they sell, but the original owner would not pay tax at this point.
How can wealth planning help business owners?
When you’re tied up running a company, it can be hard to find time for your personal finances. A wealth planner can help you create a plan that ensures you secure your business and take the right steps to protect your wealth. This will provide peace of mind that all your hard work will reap the rewards it deserves.
(1) The impact of emotions on financial planning decision-making was commissioned by Kleinwort Hambros and conducted by Research in Finance