Recent budgets have introduced changes to the mechanism of tax collection in Ireland. The traditional progressive income tax model has been complemented by the introduction of very harsh levies. To a business owner, an increase in these levies, coupled with the significant reduction of the maximum pension fund allowable to €2 million, as well as operating in increasingly difficult trading times, has meant that many need to take a fresh look at their options when it comes to tax efficiency and financial planning. With professional planning, the business owner can still be in a strong position when it comes to the opportunities of creating wealth and, even more importantly, keeping as much as possible of any wealth being created.
Opes Wealth Trust provides advisory services to many business owners. We focus very closely on maximising the benefits that a company structure can provide for their owners when it comes to wealth accumulation and tax efficiency. Our comprehensive approach to financial planning ensures that all your financial planning needs are looked after in a professional manner.
Although each client is different, the case study below provides an outline of the type of work we have carried out for a particular business owner.
Case Study – The business owner
Jack is aged 56, married to Anne aged 55, with whom he has two children. Jack also has two children from a previous marriage. Jack and Anne have significant assets and are joint owner directors of a successful company through which they pay themselves a salary of €100,000 each. They also have significant foreign property assets as well as both Irish residential property (including section 23 tax-based property) and business property with outstanding debt. Jack has a number of small pension funds with various providers in place. Jack outlined to us that he would like financial freedom as soon as possible but feels that he is a few years away from that. He is also considering selling the business, either on the open market or to his eldest son.
Opes Wealth Trust began the planning process by, firstly, carrying out a detailed fact-finding exercise with Jack and Anne, followed by a comprehensive exercise broadly focusing on the following:
Assessment of Financial Objectives
- We assisted Jack and Anne in defining their desired lifestyle income, which turned out to be €100,000 (in today’s terms) net per annum (or €8,333 per month) at their target date (Jack’s 60th birthday) – this is the after tax income they require/desire to fund their monthly lifestyle and it is an essential figure for the calculation of the future capital requirement to fund their future lifestyle.
- We outlined that the capital fund (level of assets) required in 4 years’ time to meet their income target is approximately €3,679,236 (this asset base, gross of tax, will ultimately depend on how the desired income level is being provided at that time; we outlined a number of possibilities to them).
- We assessed their progress against this financial target based both on their current asset base and the existing level of regular pension funding and investing. We calculated that they would attain approximately 85% of their financial target should they continue to do what they are currently doing.
- We outlined the additional regular funding (through pensions and investing) that they would be required to make in order to reach their financial objective within the desired time frame.
- We outlined tax-efficient planning tools and how more tax-efficient investing can accelerate the narrowing of the financial gap between their current situation and where they need to be in 4 years’ time.
- We provided a detailed analysis of their investments and outlined the annual investment returns that would need to be achieved to reach their financial goals.
Opes Wealth Trust carried out a risk analysis on behalf of Jack and Anne on their overall investment portfolio to determine their actual investment risk tolerance against their stated attitude to risk. Based on our analysis we identified that they were overweight in property as an asset class. In order to rebalance their portfolio they needed to give consideration to alternative asset classes (such as equities, bonds, cash, commodities, alternative energy, etc.).
Jack and Anne have their outstanding property debt protected in the event of either of their deaths through sufficient life cover. As you read on you will see that, by the end of the planning process (which lasted approximately 12 months) they were financially independent, so no other forms of protection were required as their assets recreate their income regardless of illness or disability.
Jack has, over the years, contributed sporadically to four different company pension plans. He has been an owner director of his current business for 24 years which has been very profitable in recent years. We carried out a comprehensive review of all his pension benefits. Opes Wealth Trust outlined to Jack the main benefits of his company establishing a Small Self Administered Scheme (SSAS) on his behalf. A SSAS provides more control, transparency and flexibility around investment options than standard executive pension plans. As Jack has made relatively little pension provision and considering his age, we identified that there was scope for his company to make significant additional pension contributions on his behalf, free from tax. A SSAS was established on Jacks behalf to which the company made a significant cash contribution. Furthermore, his existing pension plans were transferred into the SSAS leaving substantial cash available to invest. This also allowed Jack to diversify more from the business as well as invest in other asset classes (outside of property) in a tax-efficient environment.
As well as significant property assets, Jack also has an equity-based portfolio which has suffered significantly in recent times. With cash now in his pension fund (SSAS) he has the opportunity to take advantage of some clever tax planning. By selling his private equity holding at market value he can purchase a very similar type of stock portfolio again, at market value, using the cash funds available in his SSAS. The benefit of this transaction is that Jack has purchased the new shares with pre-tax money (through his pension fund) and any future growth in the value of these shares are also free from tax once held within the pension structure. Jack can also carry forward the capital losses incurred on the sale of the shares in his personal name indefinitely, and these losses can be offset against future gains when other personal assets are sold. We have simply replicated in his SSAS what was his personal portfolio in a very tax-efficient manner.
Opes Wealth Trust outlined to Jack and Anne the requirement that, as parents, they must provide for all their children within their means. We outlined that Jack, under section 117 of the 1965 Succession Act, must make provision for the children of his former marriage. We set out the need for a comprehensive approach to estate management to ensure that Jack and Anne’s wishes are adhered to in the event of their death. We highlighted the importance of updating their Will and also reflecting on other non-Irish Wills. As part of this exercise we also highlighted the need to have an up-to-date and centralised register of assets and liabilities and of having the appropriate Trustee/Executor to the estate and Guardian (to their children) named in the Will. Furthermore, because of the significant asset base that they have, we suggested that they consider putting in place a post-death investment mandate, to be included in the Will.
Business Exit Planning
Opes Wealth Trust outlined Capital Gains Tax relief that allowed Jack and Anne to dispose of their interest in their company without a charge to tax. We also outlined the options for their son to take receipt of the business at a discounted price. The result of this was considerable savings to both parents and son. The significance of this particular piece of planning to Jack and Anne was that it was an unexpected bonus during the planning process which resulted in them achieving their financial freedom three years ahead of schedule (Jack aged 57 rather than aged 60).
On completion of exiting from the business, a capital sum was made available which was used to pay off property debt. This increased the available rental income which in turn was sheltered from income tax by Section 23 relief (although rental income is now subject to the Universal Social Charge). The net result of this was that the debt which existed in Jack’s private name was cleared by funds from the company with the result of creating an income stream to him free of income tax.
Having completed the planning process and implementing our recommendations, Jack and Anne are now financially independent three years ahead of when they thought it possible, and now have the freedom to do the things they had long planned for in retirement. They have sold the business to their son in a manner that has benefited both parties by using the tax code to their advantage. Their assets are now producing their desired net income. They also have the peace of mind that comes with knowing that, in the unfortunate event of something happening either of them, they have a tax-efficient and up-to-date estate plan that deals both with how their youngest children are looked after and ensures that their final wishes for their estate are carried out effectively.