UK Best structure for tax efficiency

[Ukindividual]

Hi Everyone

I hope you’re all well and enjoying the weekend.

My financial situation is quite messy. If I describe it below, I would appreciate any input as to tax efficient options I could consider. I’m thinking about a holding company but not sure if it would work for my setup.

There are three companies:

Company A, my wife is director and I am a PSC shareholder. Company A was making £4-5k net profit pcm with little marketing but since Covid, it now makes barely ~£1k pcm net profit. My wifehas a full time job elsewhere and has no financial interest in the company A.

Company B, I am director and PSC shareholder. My brother also owns 49% shares. Company B was making £8-10k net profit pcm pre-covid and currently makes £3-4k net profit pcm, all with little to no marketing.

Company C, my father is sole director and PSC but I run the business for him, it’s pretty much 80% automated. Pre-Covid it was making around £2-3k pcm net profit and now makes ~£1k net pcm with zero marketing.

All 3 businesses operate from the same premises.

I am a homeowner and have a lot of personal outgoings: utilities, insurances, credit cards etc. I need £3,000.00 pcm to cover my personal outgoings. I also have small shares in Peloton and Deliveroo and want to buy more shares in future. I also own some cryptocurrencies to the value of £5,000. I have over years, invested £70k into a cryptocurrency mining setup that currently generates around £1k pcm but is unrealised gains until I convert to GBP. I don’t intend to convert for 4-5 years.

My wife earns £1500.00 pcm from her employment after tax and is left with around £150/pcm after all her expenses. We both have a lot of credit cards which got us through Covid and a house renovation just months before Covid.

My father is a Homeowner but retired and needs around £1500/pcm for his expenses.

My brother who is a shareholder of Company B, he lives with parents and needs £1500/pcm for his expenses but works hard and should be on £3500/pcm for his role in the business.

At the moment, we have 3 invoicing systems, 3 bank accounts, 3 business insurance policies, 3x accountant fees.

Company A has around £5k assets
Company B has around £50k assets
Company C has £500 assets

What would be the best way to restructure our businesses to be most tax efficient? Would a holding company be beneficial in any way? Maybe for risk mana

 

[Praz Finpoint]

Its complex but I can offer 2 quick simple suggestions to reduce the overall tax bill:

1. Both your brother and yourself are managers of the Company and should charge to the respective Companies salary expenses, at fair value (i.e. based on industry trends for salary ranges), based on hours / time spent for each business. E.g. your Brother salaries must be 3,500 and accordingly charge a monthly salary to the Company account as an expense. The expenses will naturally be tax deductible and reduce the tax burden. The fact that the Company does not have the cashflow to pay for the salaries is a separate matter and this unpaid salary portion can continue to accrue as a liability the Company books until such time the Company can settle the bills. But there is work performed by the Managers for the Company's benefit and business activities, and the expense of time spent must be reflected.

2. All business must have a registered office premises where the business are organized and located - identify this location and if it is your home, designate a location / space within the home, where you and your brother work, and charge a monthly lease expense to the Company for use of this location, at a fair market price based on space within the home used and market rental rates, to the Company, which further adds expenses to the Company which is tax deductible and reduce the tax bill. Again the fact the Company does not have the cash flow to pay the lease is a separate matter and this can remain accruing as an unpaid liability in the Company books.

 

[Ukindividual]

Its complex but I can offer 2 quick simple suggestions to reduce the overall tax bill:

1. Both your brother and yourself are managers of the Company and should charge to the respective Companies salary expenses, at fair value (i.e. based on industry trends for salary ranges), based on hours / time spent for each business. E.g. your Brother salaries must be 3,500 and accordingly charge a monthly salary to the Company account as an expense. The expenses will naturally be tax deductible and reduce the tax burden. The fact that the Company does not have the cashflow to pay for the salaries is a separate matter and this unpaid salary portion can continue to accrue as a liability the Company books until such time the Company can settle the bills. But there is work performed by the Managers for the Company's benefit and business activities, and the expense of time spent must be reflected.

2. All business must have a registered office premises where the business are organized and located - identify this location and if it is your home, designate a location / space within the home, where you and your brother work, and charge a monthly lease expense to the Company for use of this location, at a fair market price based on space within the home used and market rental rates, to the Company, which further adds expenses to the Company which is tax deductible and reduce the tax bill. Again the fact the Company does not have the cash flow to pay the lease is a separate matter and this can remain accruing as an unpaid liability in the Company books.

Hi Praz

Thank you so much for taking the time to respond.

If me and my brother charge salaries of say £3,500 pcm to the company, whilst it will reduce corporation tax liability, won’t this greatly increase our income tax and NI?

I did some reading up last night.. Wouldn’t it be better to keep our salaries at £12.5k per annum, expense as much of our own outgoings to the company where possible and then top up with dividends?

 

[Praz Finpoint]

Hi Praz

Thank you so much for taking the time to respond.

If me and my brother charge salaries of say £3,500 pcm to the company, whilst it will reduce corporation tax liability, won’t this greatly increase our income tax and NI?

I did some reading up last night.. Wouldn’t it be better to keep our salaries at £12.5k per annum, expense as much of our own outgoings to the company where possible and then top up with dividends?

My suggestion is to run a profit projection on the overall tax bill by running 2 different scenarios - charging salaries expense to the Company and then incurring personal income tax vs no charging salaries expense to the Company and then incurring tax on dividends income (if dividends income is taxable in your country) to determine the overall tax bill.

By the way you cannot expense all your outgoings to the Company - only outgoings incurred in direct relation to the ordinary activities of the business.