Mazars Case Study 4
ABC Limited was incorporated in 1995 and Jim became a director and shareholder of the company in 1998. In 2009 Jim became the largest shareholder in what was by then a PLC and by 2012 he was the majority shareholder.
ABC Limited became an audit client of Mazars in 2010 and Jim was subsequently introduced to Mazars Financial Planning in 2011. At that stage Jim was principally concerned with looking at tax efficient profit extraction from the company as, in the years leading up to 2011, Jim and his business partner, Bob, had been remunerated principally through the funding of Employee Benefit Trusts (EBT). Mazars’ Partners Ian Wrightson and Ian Archibald advised Jim and Bob to move away from the aggressive tax planning strategy involving the use of EBTs and instead consider a remuneration package built around salary, dividend, employee benefits and the use of approved tax planning vehicles.
Jim decided that he wanted to exit the business and sought advice from Mazars and MFP as to how this may be achieved. Due to the high level of profits generated by the business over successive years, ABC Limited had accumulated significant levels of cash to the extent that it potentially compromised Jim’s ability to attract Entrepreneur’s Relief on the sale of his shares.
Following advice from Ian Archibald and MFP, Jim decided to implement a strategy which involved increasing his income from ABC Limited to in excess of £1m per annum in order to fund a planned investment into EIS.
Although Jim had not invested any significant sums in the past as he had invested almost all his efforts into growing ABC Limited, he was comfortable investing large sums into EIS. This was in part due to the clear goal he had in mind of extracting the maximum possible amount from the business in a manner that would involve the minimum possible tax “leakage”. Jim also appreciated the work MFP undertook behind the scenes in screening and selecting EIS vehicles that complimented Jim’s attitude to risk.
Although MFP Partner Carl Ward encouraged Jim to consider other tax efficient means of extracting profits, such as pension contributions, Jim’s prejudice towards pensions meant that this was not explored to any significant degree at the time.
With assistance from Mazars’ tax department, it was possible to amend Jim’s 11/12 tax return to the extent that he paid no Income Tax in 11/12.
After the successful implementation of the initial £1m EIS investment, Jim agreed to invest a further £1m into four further EIS arrangements as part of the exit/cash extraction strategy.
Although Jim’s overall exposure to EIS now totalled 17% of his total net worth, the Income Tax and estate planning benefits were sufficient for Jim to overlook this in order to implement his strategy.
Jim implemented the final stage in the three year profit extraction plan by agreeing to invest another £1m into four EIS arrangements. Once again, MFP was able to source four EIS that complemented Jim’s existing portfolio of EIS arrangements.
Jim was also becoming increasing comfortable with the concept of investing outside of his business and he had become open minded to the prospect of using pension contributions as another means of extracting profits from ABC Limited.
After meeting with Carl to reconsider the merits of pension contributions as a tax efficient way extracting money from the business with estate planning and personal tax related benefits, Jim agreed to instruct a £176,500 employer contribution, utilising his entire available carry forward.
At the same time MFP reviewed the Personal Pension that Jim was using to receive a £300 per month contribution from ABC Limited and subsequently recommended a SIPP invested in IAS Capital Growth. Not only did this ensure that Jim was invested in an appropriate strategy but it also provided Jim with valuable knowledge and experience prior to the decisions he would make in 2015.
Jim agreed to sell his shareholding in ABC Limited under a management buy-out let by his co-director, Bob, for more than £7 million. After setting amounts aside for the payment of CGT on the sale and a significant sum that will be hopefully be paid by 2020 relating to the EBTs that ABC Limited were funding, Jim received £5.75m in cash.
Now that Jim was in possession of such a large cash sum, he wanted to ensure that a suitable home for it was sought whilst he gave consideration to how the funds might be invested for the longer term. MFP introduced Jim to the Dynamic Cash Management Service. By spreading the agreed £5.75m across several institutions, Jim could expect to receive c.1.5% interest whilst retaining instant access to the funds.
Jim’s attention now shifted towards how the cash could be used to fund his current and future lifestyle. In consultation with the MFP team, a cashflow model was constructed, allowing Jim to validate the belief that the £5.75, plus his existing cash, EIS and pension assets would be sufficient to fund his lifestyle indefinitely.