THE IMPACT OF INNOVATION

1
In Association with Steele Raymond Solicitors
WELCOMES YOU TO OUR Twenty First Year of
Executive Corporate Briefings
2
David J TusonChief ExecutiveCorporate
Planning Group
3
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

4
INTRODUCTION

• Purpose of the briefing
• How many months in a year do we work for the
  Inland Revenue?
• How much do we pay ourselves compared with how
  much we pay the Inland Revenue?
• When was the last time the Inland Revenue advised
  us of all our reliefs and entitlements?
• Are we prepared to take action now and take
  advice to allow us to retain more of what we
  create?

5
THE AGE OF COMPANIES

• 4 out of every 5 companies incorporated in the
  1980s and
• 4 out of every 10 companies incorporated in the
  1990s
• HAVE NOW DISAPPEARED!!
• 85 of Companies House register comprise
  companies less than 20 years old
• Two thirds of all companies are less than 10
  years old Source Companies House

6
Some Thoughts

• What are we going to do with our companies?
• If selling, consider the impact of Taper Relief
  tax rate 10 after four years(2 years proposed
  effective 6/4/02)
• If passing to next generation consider your
  independence

7
Reclaim of current and past three years Income Tax

• Question Would you exchange

115,000
For
200,000
8
Reclaim of current and past three years Income Tax

• Example Assume gross taxable earnings of
  500,000 over 4 years taxed _at_ 40 200,000 tax
  paid
• Spend 115,000 to receive 200,000 refund from
  Inland Revenue

Fee payable 5 of net saving
i.e. 85,000 SAVED 4,250 fee
9
Reclaim of current and past one years Capital
Gains Tax
Question Would you pay 230,000 to
receive 400,000 ?
Example Assume gross taxable capital gain of
1 million taxed _at_ 40 400,000 tax paid Spend
230,000 to receive 400,000 refund from Inland
Revenue
Fee payable 5 of net saving
i.e. 170,000 SAVED 8,500 fee
10
THE SOLUTION

• Use the 1997 Finance Act investing in
  qualifying British films effective from 1998, was
  valid until 2000 now extended to 2005

11
THE LOGISTICS

• Set up a Film Trading Partnership maximum 20
  partners
• Purchase and lease back 2/3 films maximum cost
  15M each
• Partners capital equates to 23 of costs
  balance supplied by third party bank underwritten
  by producers income stream
• Partners claim 100 relief of total costs
  including bank borrowing
• No perceived commercial risks

12
What does the Inland Revenue say ?

• REV 13. 21st March 2000
• Tax Treatment of Expenditure on Films
• Measures to ensure the continued smooth
  operation of the present tax regime for the UK
  film industry are to be introduced in the
  forthcoming Finance Bill.
• Sec 68 deems what would normally be capital
  expenditure to be revenue expenditure and allows
  it to be written off by two methods that roughly
  equate to accountancy practice. The effect is
  that no receipts from the films are charged to
  tax until all the production or acquisition
  expenditure of the film is written off.
• Sec 48 allows 100 write off of costs.
• Sec 48 originally had a three year life, but was
  extended by the 1999 Finance Bill to 2nd July
  2002, further extended to 2005..

13
To arrange an appointment to discuss in greater
depth
Film Partnership

• TICK THE BOX

14
MAXIMISING YOUR COMPANY VALUE
15
Why use an independent expert valuer rather than
existing professionals ?

• Inexperience of a specialised and complex subject
• Existing adviser not wanting to raise expectation
  or cause disappointment
• Too close to the Board of Directors
• Depending on the reason for valuation, could
  upset one or more of company directors/shareholder
  s and lose audit
• Existing advisers may make use of outdated
  methods and rules of thumb to value your most
  valuable asset

16
Reasons for an Independent Valuation

• Selling 100 of your company
• March 1982 base date valuation
• Selling a majority or minority shareholding
• Buying either of the above
• Knowing your worth and planning for retirement
• Establishing value for capital raising purposes
• Preparing for a market floatation
• Probate
• Share incentives
• Share disputes

17
QUESTION

• Would you pay
• 10,000/20,000 to gain circa 4 million?

18
A Real and Recent Shocking Example

• Net assets value of the company ?
• Stock 80,000
• Property (lease) 460,000 (purchased in 1999)
• Debtors 40,000
• Cash 300,000 (surplus cash 200k)
• 880,000
• Creditors (60,000)
• Company valuation 820,000
• Even the existing advisers rejected this

19
The Accountants valuation approach

• Performance value of the company ?
• Profit before tax 1998 210,000
• 1999 (130,000)
• 2000 450,000
• Accountants say maintainable profit before tax
  180,000
• (presumably an approximate average for these
  three years)

20
The Accountants valuation approach (cont)

• Maintainable profit pre-tax
  180,000 (the straight average approach)
• Quoted company comparables price earnings ratio
  16 (presumably gross!)
• Value 16 x 180,000 2,880,000
• Add surplus asset (cash) 200,000
• 3,080,000
• 30 discount for private company status
  (924,000)
• Accountants total value for the company
  2,156,000

21
Corporate Planning Valuations approach

• Add back the exceptional expense of 460k in 1999
  to that years profit
• Use a weighted average to produce a rock bottom
  maintainable profit of 370,000
• Consider the companys conservative forecast-
  2001 2002 2003
  2004 2005 480,000 528,000
  581,000 639,000 703,000
• Therefore, a minimum profit of 400,000 is
  sustainable.

22
Corporate Planning Valuations approach (cont)

• And a benchmark minimum value, assuming that the
  Accountants PE is correct, of-
• 16 x 400,000 6,400,000
• Add 40 for the control premium 2,560,000
• Deduct 30 private company discount
  (2,688,000)
• Add surplus cash asset 200,000
• CPVs total minimum valuation 6,472,000

Versus Accountants value of 2,156,000 A massive
uplift of 4.3million !
23
What is the Difference ?

• Value lies in the future
• Value depends on the expected return, the
  anticipated risks and the cost of money
• The return is the future profit and/or cashflow,
  which flow to an investor or purchaser
• Intellectual property and intangible assets often
  ignored in your accounts e.g. patents and
  trademarks

24
THE COSTS

• The cost of doing nothing
• The cost of getting it wrong
• The cost of using inexperiencedadvisers

25
Typical Fee Quotation

• Small private company (T/O 500,000/5m)
  5,000-8,000
• Medium private company (T/O 5m/10m)
  8,000-15,000
• Large complex company 10,000 min
• All fees quoted in advance after a free review of
  papers

26
To arrange an appointment to discuss in greater
depth
Company Valuation

• TICK THE BOX

27

• PENSIONS!!!!
• Is there a better alternative ?

28
An even better alternative

• Provided you have a minimum of eight
  employees, including directors, set up an
  Employee Benefit Trust

29
An even better alternative
WHY ?

• High potential level of contributions, all
  taxdeductible
• No Benefit in Kind or NI charges when funds
  invested
• Monies invested in gross funds (no tax charge)
• Interest free loans (unsecured)
• Ring-fence funds from creditors
• Potential method of extracting tax free cash
• No impact on value of company

30
An even better alternative

• Income tax savings
• Capital gains tax savings
• Corporation tax savings
• Inheritance tax savings
• Finance/mortgages at 2
• 100 capital allowances
• Creates a market for private company shares
• Greater flexibility and benefits than pension
  schemes

31
QUOTE by LEADING QUEENS COUNCIL

• Being a potential beneficiary of an Employee
  Benefit Trust under present legislation would be
  far more beneficial than being a member of either
  an approved or unapproved pension Scheme

32
A Simple Mortgage Comparison Scenario

• Company director paying income tax _at_ 40
• Company paying corporation tax _at_ 20
• Amount of mortgage 100,000
• Term 15 years
• Repayment of capital, and interest _at_ 6
• Net cost to director per annum 9,600 over 15
  years 144,000

33
A Simple Mortgage Comparison Scenario

• To provide director with a net amount of
  9,600 per annum will cost his company
  14,760 per annum over 15 years
• total cost 221,400
• IS THERE AN ALTERNATIVE ?

34
THE ALTERNATIVE

• EBT makes director 100,000 interest free loan
  (taxed as a Benefit in Kind _at_ 5) Tax _at_ 40 2
  net.
• Company has saved 20,000 corporation tax on EBT
  contributions, so cost to company only 80,000
  giving a saving of 141,400 (221,400 minus
  80,000).

35
THE ALTERNATIVE - cont

• After 15 years the cost to director is 30,000
  (5,000 taxed at 40 2,000 x 15 years) against
  144,000, saving 114,000.

Director will have outstanding debt of 100,000
against own estate thereby potentially saving a
further 40,000 inheritance tax at death.
36
Employee Benefit Trust

• What does the Inland Revenue say?

37

• QUOTE (1)
• Subject to your confirmation that the governing
  deed has been executed in the precise form of the
  copy deed provided to the Inspector at x
  District, it is accepted that the deed whenever
  executed establishes a valid trust by xyz Limited
  (the company) for the beneficiaries as defined

38

• QUOTE (2)
• The trustees may apply all or part of the trust
  fund and the income thereof in favour of such one
  or more of the beneficiaries as the trustees
  shall decide in exercise of their power in Clause
  3

39
Employee Benefit Trust
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

40
Paul CaustonPrivate Client PartnerTax
Planning the company sale
40
For more information visit www.steeleraymond.co.uk
/events
41
TAPER RELlEF

• Yrs held of gain chargeable of gain
  chargeable
• (business) (non-business)
• 1 87.5 100
• 2 75 100
• 3 50 95
• 4 25 (tax10) 90 (tax36)
• Note
• Gains on non business assets still taxed at 24
  after 10 years
• Press release 18.6.01 2 year period for maximum
  business assets taper
• Indexation allowance to April 1998

41
For more information visit www.steeleraymond.co.uk
/events
42
Taper Relief - Business Assets - Shares

• Individuals must hold
• shares in an unlisted trading company
• shares in a company of which he is an officer or
  employee and is either trading or he has no
  material (10) interest
• shares carrying 5 of voting rights in a listed
  trading company

42
For more information visit www.steeleraymond.co.uk
/events
43
Taper Relief - Business Assets - Problems

• - is the company a trading company?
• Important except to employee shareholders
  with no material interest
• 20 rule what does it mean?
• particularly in marginal cases housekeeping
  is vital
• Consider demerger especially with new 2
  year period

43
For more information visit www.steeleraymond.co.uk
/events
44
Taper Relief - Business Assets - Problems

• Non Business Periods
• Frequently the change in definitions from
  6.4.00 means no maximum relief before 6.4.10
• Start again or extend the period?
• Use of friendly trust especially if
  retirement relief in point
• Effect the sale for shares or loan notes

44
For more information visit www.steeleraymond.co.uk
/events
45
Taper Relief - Business AssetsPaper for Paper
sale

• Principles clearances
• If purpose is to preserve Business Taper
  must be for shares or non QCBs
• Loan stock must be commercial and negotiable
  (but can be guaranteed)
• Relief still depends upon continuing status of
  acquiring company

45
For more information visit www.steeleraymond.co.uk
/events
46
Taper Relief - Business Assets

• Value of a full review of relief position
• Limited exposure to fluctuations in value
• Change of activity (close companies)
• Value shifting (close companies)

46
For more information visit www.steeleraymond.co.uk
/events
47
Company Sale Payments from the Company

• Pension fund contributions
• Golden handshakes
• Pre-sale dividends (income tax)

47
For more information visit www.steeleraymond.co.uk
/events
48
Company Sale - Stock Dividends

• Dividend declared with stock alternative
• Sellers take new stock
• Pay income tax at 25
• Base value for CGT raised
• Less common following generous business taper
  relief
• Potential risks

48
For more information visit www.steeleraymond.co.uk
/events
49
Company Sale - Change of Residence

• CGT only charged on residents
• 5 year rule
• Use of double tax treaties

49
For more information visit www.steeleraymond.co.uk
/events
50
Company Sale - Post Transaction Planning

• EIS investment
• Loss creations schemes especially film
  partnerships
• Income receipts enterprise zone investment

50
For more information visit www.steeleraymond.co.uk
/events
51
Company Sale - Post Transaction Planning

• Aggressive schemes e.g.
• Artificial stock dividends
• Offshore EBTs

51
For more information visit www.steeleraymond.co.uk
/events
52
Company Sale - Other Taxes

• Stamp Duty
• Inheritance Tax

52
For more information visit www.steeleraymond.co.uk
/events
53
To arrange an appointment to discuss in greater
depth
Tax Planning the company sale

• TICK THE BOX

54
David J TusonChief ExecutiveCorporate
Planning Group
55
Further Ideas

• Enterprise Investment Scheme
• Non Domicile Status
• Home Loan Scheme
• Bond Loan Scheme

56
Enterprise Investment Scheme (EIS)

• If establishing a new company consider
  structuring under the EIS Rules as this will
  enable you to sell this company in three years
  time with no tax liability.

57
Enterprise Investment Scheme
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

58
Tax advantages for non-domiciled

• IT/CGT anti-avoidance legislation need not bite
• Income arising outside UK - free of tax until
  remitted
• Capital gains tax on non UK assets free of tax
  until remitted
• Possible protection from IHT for Non UK assets

59
Offshore structures to extend advantages

• A Non resident trust will (1) separate
  income from capital, so (2) capital
  distributions received in the UK are tax
  free
• Tax effective property ownership through
  Non-resident company
• Separate contract for non UK employment tax
  free if salary used outside UK

60
Non Domicile status
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

61
Home Loan Scheme

• Objective
• to enable an individual to remove the
• principle residence from their estate for
• inheritance tax purposes

62
Home Loan Scheme
Gloria
63
Home Loan Scheme
Gloria
Interest in Possession Trust 1
64
Home Loan Scheme
Gloria
Gloria - Life Tenant
Interest in Possession Trust 1
65
Home Loan Scheme
Gloria
Gloria - Life Tenant
Interest in Possession Trust 1
BUYS
66
Home Loan Scheme
Gloria
Gloria - Life Tenant
Interest in Possession Trust 1
BUYS
I.O.U
67
Home Loan Scheme
Gloria
Gloria - Life Tenant
Interest in Possession Trust 1
BUYS
I.O.U
Interest in Possession Trust 2
68
Home Loan Scheme
Gloria
Gloria - Life Tenant
Interest in Possession Trust 1
BUYS
I.O.U
Interest in Possession Trust 2
Glorias Children Life Tenants
69
Home Loan Scheme
Gloria
Gloria - Life Tenant
Interest in Possession Trust 1
BUYS
I.O.U
Interest in Possession Trust 2
Glorias Children Life Tenants
70
Home Loan Scheme
Before
After

• House 1,000,000
• Invested 200,000
• Cash 50,000
• Total 1,250,000
• Nil rate (242,000)
• 1,008,000
• IHT liability _at_ 40
• 403,200

• Loan note 1,000,000
• Gift - trust 2 (1,000,000)
• Invested 200,000
• Cash 50,000
• TOTAL 250,000
• Nil rate (242,000)
• 8,000
• IHT liability _at_ 40
• 3,200
• Saving 400,000

71
Home Loan Scheme
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

72
Bond Loan Scheme

• Objective
• for an individual to gradually reduce his/her
• estate for Inheritance tax purposes without
• sacrificing a large part of his income

73
Bond Loan Scheme
Tom
74
Bond Loan Scheme
Tom
Spouse
75
Bond Loan Scheme
Tom
Spouse
Discretionary Trust
10,000
76
Bond Loan Scheme
Tom
Spouse
Discretionary Trust
510,000
Loan 500,000
77
Bond Loan Scheme
Tom
Spouse
Discretionary Trust
10,000
Loan 500,000
500,000
Investment Bond
78
Bond Loan Scheme
Tom
Spouse
Discretionary Trust
35,000
Loan 500,000
5 p.a. 25,000
475,000
Investment Bond
79
Bond Loan Scheme
Tom
Spouse
Discretionary Trust
10,000
Loan now 475,000
5 p.a.
Loan repayment
25,000
475,000
Investment Bond
80
Bond Loan Scheme
Tom
Spouse
Discretionary Trust
10,000
Loan now 475,000
5 p.a.
Loan repayment
25,000
475,000
Investment Bond
81
Bond Loan Scheme

• Tom
• Assets 750,000
• Loan to Trust (500,000)
• Loan 500,000
• TOTAL 750,000
• 5 loan repayment from trust in lieu of income
• 25,000

• Trust
• 10,000
• 500,000
• (500,000)
• 10,000
• 5 withdrawal from bond to effect loan repayment
• (25,000)

82
Bond Loan Scheme

• Toms Estate
• Originally 750,000
• Year 1 725,000
• Year 5 625,000
• Year 10 500,000
• Year 15 375,000
• Year 20 250,000
• Annual IHT saving _at_40 - 10,000
• IHT saving over 20 years - 200,000

83
Bond Loan Scheme
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

84
ANNUITIES

• If you currently own a Directors Pension Scheme,
  do you really want to lose your fund on the death
  of yourself and spouse?
• If your existing pension fund has a minimum value
  of 250,000 you may have the following options.

85
ANNUITIES

• Buy your ordinary annuity on or before age 75 and
  loose the residual value on death or
• Transfer the fund and purchase an open annuity,
  retain 100 and let your children pay tax _at_ 40
  on the death of yourself and spouse
• Arrange the annuity so no tax is payable.

86
Open Annuity
To arrange an appointment to discuss in greater
depth

• TICK THE BOX

87
THE NEXT STEP

• Do Nothing! (Achieve nothing)

• Do something now

Arrange a mutually convenient appointment to
commence saving money!
88

• The end

• Please hand in your tick sheets

?
?
?
?
?
?
?
?
Tick Sheet

• Thank you for your attendance