In this months Allbright column, their members asked questions all about turning your passion into a business and about inheritance planning. Frankie gives her expert advice:
I’m starting to build my business; how did you stay positive and navigate those challenges that founders face early on?
Firstly, congratulations on taking that leap to starting your own venture, really exciting! I appreciate what you’re saying about the challenges, as sometimes these can feel insurmountable especially in the early phases or when you’re starting to build your team out. Staying positive can be tough but there are three things I would focus on:
Set clear goals and celebrate small wins – technically this is two, but I think it’s important to congratulate yourself even when you reach small milestones.
Setting goals might seem obvious, but having clear, achievable goals with a set of actions to support them really helped to give direction and a sense of purpose. They acted as my milestones, providing small wins which can help you remain optimistic during the early days when you may be receiving some setbacks.
As we started to grow, I set quarterly business objectives and reviewed these with the team monthly. I found this helped bring everyone back on the same page and helped to track how we were doing against our targets.
Build a support network
The best thing I did quite early was to put my experienced advisory board in place to support me with the strategic decisions I was making. I would recommend that to anyone who is starting / building a business. I decided to choose people who didn’t have financial experience from a financial planning perspective on my board, because of the type of business I wanted to build and so I put together people who brought different skillsets. Of course, this is unique to you and your business so take some time to consider who and what you need for your business. My advisory board has supported me through some of my biggest challenges as a new founder, such as building a pitch deck, fundraising and interviewing to grow the team.
Which brings me on to the next point on this topic, which is your team. In a start-up these will also act as your support network, so my approach is to hire people that have better skill sets than you in certain fields and learn from them. Someone who truly buys into your mission will be a great advocate for your business and great to have onboard! I’d also recommend getting yourself out there and networking. Although it might not come naturally to you, you’d be surprised at the amount of business that is done outside of working hours! I’ve also found this a great way to meet like-minded people on a similar journey to myself who I can chat through challenges and ideas with.
Know your numbers
Understanding the financials of your business is crucial! Not only for fundraising purposes but also from a personal perspective. Having a detailed business plan that you can update as you evolve, understanding your revenue streams, costs, and profit margins not only helps in making informed decisions but also provides a clear picture of your business’s health, which can alleviate anxiety and boost confidence.
And finally, you may feel like personal financial planning is a long way off, especially in the early days of growing your business. However, I would challenge that and say that each day put off your own financial admin, the further away you’ll be getting from your goals. I would encourage you to check in with your personal financial planning to ensure you aren’t putting everything into the business to the cost and detriment of your own financial wellbeing. Maintaining your personal financial health can help reduce stress and allows you to focus on what is most important – growing your business.
You want to be considering how you can grow your personal wealth alongside your business, so the two go together. My recommendation would be to engage with a financial planner who can help you bridge the gap between personal and business finances. With my clients who are running their own businesses I ensure they are protecting yourself whilst also optimising their cash management within the business.
I’m starting to think about inheritance planning, but it feels overwhelming. Where should I start?
What I often see is that inheritance planning starts to become a concern for people too early. Albeit I appreciate the concerns, with the current tax rate at 40%, this could have a significant impact on your family and overall estate if not planned for effectively. However, what you may not know is that you’re usually giving up access to capital in some form when you start to go down an inheritance tax planning route. So, before you think about passing on your wealth to others, you need to be confident that you have a plan in place to meet your own long-term needs. With people living longer and life taking unexpected turns at times, I recommend you are mindful of your overall financial planning, building in flexibility where you can.
As a general starting point, everyone currently has a Nil-Rate Band of £325,000, to which there is no tax due on your estate. In addition, for property owners there is a Residence Nil Rate band applicable for individuals whose total estate (property, assets, cash, savings and investments) is valued at under £2million. The Residence Nil Rate band gives those individuals a further £175,000 inheritance tax exemption. What this means, is that if your estate is under £2million and you own a property, an individual could have £500,000 at a nil-rate. Anything above these thresholds would be taxed at the 40% rate of inheritance tax.
Some important considerations though, if you leave 10% or more of your total estate to charity, your rate of inheritance tax is reduced from 40% to 36%. This may not seem like a large percentage change but can have a great impact when it comes to inheritance tax planning. In addition, under current legislation your pension assets fall outside of your estate for inheritance tax purposes, and therefore can be used as an effective way to pass money down to the next generation. For those who have accumulated wealth in the form of property, savings and investments, it is worth considering how you produce an income in your retirement and what you can use to draw upon if leaving assets to children is an important consideration for you.
What we often see in the UK is wealth doesn’t typically get passed down beyond two generations, due to inheritance tax. So, it’s important to be mindful of alternative ways, such as gifts, tax efficient investments and trusts to pass on your wealth. Here are some key considerations I recommend my clients consider:
1. Gift exemptions
Each person has an annual gifting allowance of £3,000 each tax year. This allowance can be carried forward from the previous year if it’s not been used Gifts between spouses and civil partners of any size are exempt from inheritance tax
2. Gifts for weddings or civil partnerships
– Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership – You can combine a wedding gift with your annual allowance of £3,000 to make a bigger gift in that year – There are different limits to be aware of £5,000 to a child, £2,500 to a grandchild or great-grandchild, £2,500 to your spouse or civil partner-to-be, £1,000 to any other person
3. Small gift allowance
– You can give as many gifts of up to £250 per person as you want each tax year, if you have not used another allowance on the same person.
4. Gifts out of normal income
– If you have more income than you need, you can gift it without inheritance tax implications- this is a largely unused relief and a really important one to consider – The amount of the gift is not capped, providing the gifts have been made from income, not capital, have not impacted your usual standard of living and have a regular pattern for example, monthly or annually.
5. If you are looking to make a larger gift you might make this in the form of a Potentially Exempt Transfer
– The gift is initially treated as a Potentially Exempt Transfer, starting the 7 -year clock from when the gift is made. – If you pass away within 7 years of giving a gift and there will be Inheritance Tax to pay but the amount will depend on how far into the 7 years you are from making the gift. – The tapered relief works as follows: Years 1-3 = 40%, Years 3-4= rate drop to 32%, Years 4-5= rate drop to 24%, Years 5-6= rate drop to16%, Years 6-7= rate drop to 8%, Year 7+= 0%
6. Use of different Investment Structures
– Certain types of investment qualify for Business Relief after 2 years and are subsequently exempt from inheritance tax. – This includes using AIM (Alternative Investment Market), this is a relatively illiquid market and therefore can be more volatile but does provide an effective way to move some of your investments outside of your estate at the appropriate time. This market is often used within Stocks & Shares ISA accounts and General Investment Accounts at an appropriate stage in an investors journey – What many people don’t always realise is SEIS and EIS investments (early -stage companies), also qualify for Business Relief after they have been held for 2 years. But one must remember that in investing in this way you are hoping for successful exits and on exit of these companies the money would be paid back to you, so would fall back into your estate- hence not a driving factor from an Inheritance Tax Perspective!
With so many considerations and options, it is really about finding the right plan for you and your family. Being mindful of what I said at the beginning around ensuring you do not give away assets too soon. I would highly recommend you ensure your estate planning is up to date. We know that over half of UK adults don’t have a will, and the simplest place to start is with one! Having a trust plan in place ensures you’ll be protecting your assets, meaning third parties can’t lay claim to your estate, for example reducing the impact of any future divorce or bankruptcy of a Beneficiary.
If you’d like more information on how a trust framework could work for you and / or your family, or to discuss inheritance planning in more detail I’d be happy to have a confidential call to discuss with you. Contact me at info@frankies.uk.net.