1 Tax efficient fund raising
Smaller private companies may qualify to raise money under Government-approved tax efficient financing arrangements, such as the Enterprise Investment Scheme (EIS).
The EIS provides generous tax reliefs to investors which can encourage high net worth individuals to invest in smaller growing businesses, as their commercial risk is mitigated in part by the tax reliefs available.
Businesses looking to raise finance via an equity issue should seek advice on whether they would qualify as an EIS company, as this could make them more attractive to potential investors.
Where a company does not qualify for EIS, the investors may still be able to benefit from ‘investors relief’ which reduces the tax they would pay on any gain on sale of the shares in the future. Again, advice should be sought before the investment is made to ensure any relief available is preserved.
2 Employee share plans (approved)
There are several different approved employee share incentive schemes, which are tax efficient and provide an alternative way to recruit and retain top talent to businesses.
The most generous in terms of tax efficiency is the Enterprise Management Incentive (EMI). Businesses undertaking a qualifying trade, where employee numbers do not exceed 250 (FTE) employees and gross assets are less than £30m, can issue EMI share options to their qualifying employees (broadly employees working in the business for at least 25 hours a week or at last 75% of their total working time).
Share options worth up to £250,000 can be granted to employees under EMI.
Where a business does not qualify for EMI, the Company Share Option Plan (CSOP) may provide a neat alternative. Options can be granted to employees with no Income Tax on the grant or exercise of the options, and Capital Gains Tax would apply to any growth in the value of the shares on a future sale. The limit for CSOP options is lower at only £30,000 but this is due to increase to £60,000 from April 2023.
Where businesses are keen to retain or attract top talent, but don’t have the cashflow available to pay bonuses or increase salaries, share options can be an effective and affordable way to incentivise employees. The arrangements are relatively straight forward to implement but there are some bear traps to avoid, so advice (legal and tax) should be taken before conversations commence with employees.
3 Employee share plans (unapproved)
For companies or employees such as non-executive directors that do not qualify for EMI, CSOP or any other approved share incentive plan, unapproved options can still be issued. Whilst not as tax efficient, as any growth in value is subject to Income Tax rather than Capital Gains Tax, they can still incentivise employees to help grow the business towards a successful exit.
There are more bespoke arrangements available for businesses that don’t qualify for the approved share option plans, such as issuing growth shares to employees. This can avoid the Income Tax charges that arise in the future, and mean growth is subject to Capital Gains Tax. Any company considering issuing growth shares should take tax, legal and valuation advice.
4 Pre-exit planning
Many entrepreneurial businesses are ultimately looking for that exit, be it IPO, MBO or trade sale. Any business approaching an exit should look to start planning at least two years in advance in order ensure their business and their own tax position is optimised. All too frequently skeletons fall out of the closet during due diligence, and advance planning provides an opportunity to remedy any issues before the sale process starts.
5 Succession planning
For some entrepreneurs, it’s not about an exit, but how to successfully pass the business on to the next generation without triggering tax charges. There are several ways to achieve succession in a family business in a tax efficient way but as with any trade exit, advanced planning and proactive tax advice is always advisable to avoid unwanted Capital Gains Tax and potential Inheritance Tax charges.
Would you like to know more?
If you would like to find out more about the above, please get in touch with your usual Blick Rothenberg contact or Genevieve Morris or Rob Goodley using the details on this page. For more news and insights visit our Entrepreneurs Hub.