A business could be entered either as a property/asset or an investment. Which option you choose depends largely on how much flexibility you will need when scheduling the liquidation of the business. Another consideration should be whether your client intends to make further investments into the business.
Option 1 - Model a business as an investment
Are you modelling your client's equity stake in a business? Consider entering the business as an investment, which could be sold off in the future in portions. Future investments into the business can also be easily scheduled as contributions or transfers.
To model a business as an investment, go to the Investments screen and set the investment Type to Unwrapped Investment.
To schedule the future liquidation of the business (in part or whole), transfer funds from the unwrapped investment into another account, such as cash/savings.
Transfers are scheduled under Advanced Settings > Transfers / Additional Contributions.
Since a business would usually not be the kind of asset that a client could take random withdrawals from in order to fulfill shortfall in income, we generally recommended that you also go to Advanced Settings > Liquidation Limits & Planned Withdrawals.
Set Withdrawal Limits on the business to "Do not allow".
By setting this limit you will prevent the software from taking any ad hoc withdrawals from the investment to shore up gaps in income. The software normally takes withdrawals from liquid assets when one's income fails to cover their expenses. Read more >>
You will, however, still have the option to transfer funds from the business to other accounts.
If your client plans to make future investments into the business (regularly or one-off), these can be easily scheduled as contributions or as transfers from other accounts or even surplus income.
If you are using market assumptions (asset allocations) to calculate the company's future growth, consider giving the business a 100% equity asset allocation.
If the business pays a dividend to your client, it could be entered as an annual amount on the Employment screen.
Note: To to display the annual dividend option, be sure to set the Type of employment to Company Owner. Further instructions can be found near the end of this topic.
Dividend income could also be entered as a percentage of the company's (the investment's) value and either paid out annually or reinvested into the business.
The settings for dividends are found on the Investments screen under Advanced Settings > Growth.
Use the Dividend field to set the amount of the annual dividend.
Tick Reinvest Yield if the dividend is to be reinvested into the business. Taxes will be assessed on these dividends annually, whether they are reinvested or not.
Option 2 - Model a business as a property/asset
A business could also be modelled as a property/asset. This straightforward, if slightly less flexible modelling option could be used if your client plans own the business for the duration of the plan and possibly pass it directly to a surviving spouse without liquidation. Unlike investments, properties can only be liquidated in whole, not in part, and properties do not accept contributions (further investment), although you could step up their value periodically.
Entering a business as a property does, however, have some advantages over an investment. For one, if the business is indeed a physical property, it would be categorised appropriately when viewed in the general and asset allocation overviews. And unlike an investment, related items in the plan, such as debts, incomes and expenses, can be linked directly to a property. Being linked, these items will drop from the plan automatically if the property is sold.
To model a business as a property, go to the Property / Assets screen and set the property Type to Business Property.
Liquidation of the business will occur based on the event you select as the end event (red dot) on the Time panel to the right side of the screen.
Select the Start event as the starting event (green dot) to indicate that the business is owned today, at the beginning of the plan. Otherwise, select a future event if the property is to be purchased at a future date.
If scheduling a future purchase, be sure to also tick the New Purchase check box to the centre-left. This setting will cause the software to create a one-off purchase expense in the year selected.
If your client plans to own the business indefinitely and possibly pass it to his or her surviving spouse or partner, select the final Mortality event as the end event (red dot).
When the business is liquidated, any proceeds that are not spent will go automatically into the owner's default cash account (e.g. John's Cash). Read more >>
Expand the Details panel and check and possibly edit the Growth/Depreciation Rate. This rate will be applied annually to the value of the business. A negative value may be entered to indicate depreciation, if necessary.
The Inflation Rate on the Details panel would only be applied to the future purchase price (Market Value) of business that is scheduled to be purchased sometime in the future. The inflation rate will also only be used if the future business is set to be calculated in Present Value, another setting on the Details panel. If the property is set to be calculated in Future Value, the future purchase price will not be inflated.
Expand the Liquidation panel. Verify that the default setting, "At End of Applied Timeline" is selected. This setting determines how the liquidation of the business will be timed. We generally recommend scheduling future liquidations using an event that can be easily viewed and moved, if necessary, on the Let's See and Time screens.
Future investments into a property, if any are planned, are not modeled as easily as they would be for investments. Unlike investments, properties do not accept contributions or transfers. Apart from the future growth (appreciation) of the property, you could step up its future value periodically, using the Advanced Settings > Step Up / Step Down feature. But unlike a contribution, these future steps in value will not be shown as a movement of funds. If your client plans to invest regularly into his or her business, modelling the business as an investment may be a better option.
Setting the cost basis for capital gains (CGT) calculations
Regardless of whether you model the business as an investment or property, always be certain to enter in the Purchase Value field the current cost basis for the business - i.e. the amount your client has invested into the business to date plus any gains realised on the business to date. This entry will set the cost basis on the investment for purposes of calculating potential capital gains tax (CGT) liability.
The Balance or Market Value is the current value of the business, if currently owned. For a property, the Market Value will also be the purchase price of the business if it is to be purchased in the future.
Special tax considerations for businesses
Expand Advanced Settings and select the Taxation panel.
Note: If you don't see a Taxation panel, check the investment or property Type field. These special taxation options are only available and applied to Unwrapped Investments and Business Properties.
Settings are available to indicate whether the Gains Qualify for Entrepreneur's Relief and if the business is eligible for Business or Agricultural Property IHT Relief (BPR or APR).
Tax considerations that predate the beginning of the plan
If your client has any business related capital losses or has claimed any entrepreneur's relief prior to the start of the plan, you may note these for the owner on the Taxes screen, in the Carried Over Losses and the Entrepreneur's Relief Claimed to date fields, respectively.
Be sure to select in the People panel, to the right side of the screen, the person to whom these settings apply.
Dividend income from business ownership
Dividends earned from the ownership of the business, should usually be entered on the Employment screen.
Select Type, Company Owner. This setting will expose the Annual Dividend field.
Enter the dividend net of the basic 10% tax (the corporate tax on dividends) as it is assumed that this is how the dividends will be paid out by the company to your client.
Dividends can be scheduled to increase or decrease at future events, if necessary, on the Employment screen's Step Up / Step Down panel.
If your client is a higher rate tax payer, any additional divided tax due will be worked out by the software and shown on the Let's See charts, Detailed Info panel, Taxes tab.
The summary on this tab (and in the printable Taxes (Detailed) report will show any applicable taxes as "Additional Dividend Tax".