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The Budget of 21 March 2012 didn’t hold too many changes for a two partner law firm in Yorkshire we have been working with for a number of years. Yes, the top rate of tax will be reduced from 50 pence in the pound to 45 pence from April 2013, but income in excess of £100,000 per annum will still see personal allowances removed, creating an effective tax charge of 60% on a proportion of income.
This particular firm we’ve been working with has a good business and has managed to maintain its turnover and crucially its profits even in the current uncertain economic climate. So what have we been able to advise them on in order for them to keep as much of their profits as possible?
When we first met with them we advised on the restructuring of their partnership to include a company as a third partner. The company assists in the running of the business and in turn receives a profit share. The company has essentially provided the working capital of the business which is funded out of 20% corporation tax as opposed to in excess of 40% tax.
This has provided cash flow benefits to the business as well as saving approximately £250,000 in tax over a six year period. The partners are mindful of retiring from the business in the next five years or so and as such we’re looking at the most tax efficient way of doing so with them. A potential purchaser of the business may not want the company and therefore it will probably be separated from the partnership prior to sale. On the assumption
the partners, who own 100% of the company shares, will want to extract their capital from the company, there is likely to be some tax to pay, albeit potentially only at a rate of 10%.
However, with the introduction of ABS we have been looking into the possibility of the partners passing some of their ownership of the business to their spouses. One of the benefits of doing this would be to reduce the partners’ tax bill when they come to extract the capital from the company upon or around retirement by approximately £75,000.
In order for the partners to transfer ownership to their spouses, the firm will first need to apply to the SRA to become an ABS. This involves a two stage application process.
The first stage is fairly simple. The second stage is more complicated because the firm is likely to have to provide forecasts and business plans. However, the benefit of the tax savings of £75,000 will make it more than worth undertaking the application process. We will be able to assist the partners in preparing their forecasts and business plan, thus minimising the impact on their available time.
So to summarise, the introduction of a corporate partner, and the possible transfer of some of the business ownership to their spouses has meant the partners are likely to save tax of over £300,000.