Finance, Legal Advice

Protecting Your Success: SME Asset Protection

Emma Ames | 11 August 2021 | 3 years ago

asset protection

Over half of UK SMEs do not have any succession planning in place. Ensuring you have the right procedures in place is important to protect your business in unexpected or unavoidable situations.

Business Advice sat down with Helen Hamilton, Financial Director of Oldgate Trustees, and Tom Kesterton, Director of Eclipse Financial Planning, to talk about what small businesses can and should be doing to protect their future.

The small-to-medium sized enterprise is incredibly valuable to the UK economy, employing nearly 50% of our total workforce. However, recent study shows that 61% of business owners have no formal plans in place for the succession of the business. With three quarters of UK businesses being family-owned, there is often an expectation that a company will be passed on to the next of kin but in reality, only 30% of family-owned SMEs are successfully continued by second generation owners, leaving almost 70% of UK businesses with a very limited lifespan. Many business owners do not have an official will in place and those that do many not have documents that are fully updated or adequate. A will should be used as a planning document that outlines what should happen to your assets, including your business, after death and is a valuable tool, potentially saving a business a significant amount in tax.

The business owner has two main challenges throughout their working life: taxes and unfortunately, death. Business owners need to do the necessary research and seek reliable advice on the tax breaks available during their planning phase, in order to avoid being caught out by capital gains tax or inheritance tax. Many business owners look to retire gradually and pass a company over to another family member or appointed successor. Business reliefs ensure an enterprise can continue to trade during and after the exit of an owner. Some business assets are exempt from certain taxes but there are always exceptions; business reliefs become unavailable if a business retains too much cash or property. Reviewing business assets is a critical part of the exit strategy plan, in order to clear the company of the excess cash and property that could affect the business’ eligibility for certain business reliefs.

There are a number of ways to achieve the best possible outcome for a business owner and their families. Looking at the starting point and determining the desired outcome will determined how an exit strategy is put together and how successful enterprises can be protected for the future. Ensure that you have bespoke planning in place for your assets. You can mitigate inheritance tax and potentially avoid CGT on the sale of a business if you and your legal counsel plan appropriately. You can maintain control of your assets and make sure you are still making the decisions for as long as you would like. Asset protection can be achieved through the use of bespoke drafted trusts with the appropriate powers to get the outcome you want and need.

Moving from planning for the future to planning for the unexpected, there are always inevitabilities that we cannot always predict, like sickness, accidents, or unfortunate family situations. The simplest form of financial protection is life cover. You pay a monthly premium so that if you were to pass away, a lump sum of money would come into your beneficiary, typically to pay off a mortgage or as a provision for the near future. Another option for a limited business owner is relevant person cover; this is where the company pays the premium so that in the event of the death of a key person within the business, the money is paid to that person’s estate. This means you are able to offset some of the costs towards planning for the future or for any sudden change in circumstances.

Key person cover allows you to protect your business from the impacts of suddenly losing an employee. With key person cover, the company will pay the premium and if something were to happen to that key employee, then the benefits are paid back to the company, not the employee’s estate, so it differs from relevant person cover. The company would typically need these funds to fill the position or support the company during the transition period. Key person cover is insurance that the company takes out on behalf of that employee, especially if the employee plays a significant role in the business’ operations or development.

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