If you own a successful company with cash in the bank, and assuming you are not looking to sell your business, what are the options when you decide to call it a day?
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By Chris Davies
- Firstly you might be considering a large bonus or dividend. Extracting the money in the form of a salary or dividend will usually be expensive from a tax perspective and 40% or more could be lost in tax. There are usually better ways:
- There might be the possibility of paying some into the director’s pension but you do have to be careful there for a number of reasons. Seek advice before going down that route.
- You could of course draw down the money over a number of years. That can be quite attractive particularly for basic rate taxpayers where the income can be accessed at 8.75% tax. Even more so if both you and your spouse have shares and can both draw dividends at 8.75%. But that does of course mean that you have to prepare accounts and tax returns each year for which there will be compliance costs.
- A fourth alternative is to put the company into voluntary liquidation and take the funds as a capital distribution. This can be really attractive from a tax perspective.
Tax Incentives for Voluntary Liquidation
The current maximum rate of capital gains, so long as it is not residential property is just 20% and it may be possible to get that to just 10% with Business Asset Disposal Relief (BADR).
In simple terms if you have held 5% or more of the shares in a trading company for at least two years, you may be eligible for the 10% tax rate on those shares, subject to a lifetime limit per individual of £1M.
So potentially £2M at 10% tax for a company owned by a married couple.
There are of course a number of conditions that need to be met, so check with a professional first.
If the company’s assets are under £25,000 then the process of liquidation is very simple and you do not need to involve a liquidator. But anything over £25,000 of proceeds and you would.
We can help you select a liquidator you can trust. Personally I would be very nervous of handing over the keys to my company bank account to a cheap firm advertising on the internet that could be gone in a flash with all the money in the bank.
So why doesn’t everyone liquidate their companies frequently and pay tax at 10% rather than 40%+
How often can I liquidate my company?
Well at one point it was quite a common occurrence. The owner would extract the funds at 10% and potentially start another company to do the same over and over again.
The tax man saw that as unacceptable and there are now Targeted Anti Avoidance Rules that seek to prevent any such abuse.
That said, when liquidating a company is done for legitimate business reasons, and not on a regular basis, it continues to be an option.
So in conclusion if your trading company is coming to an end, a 10% tax rate on extracting assets of up to £1M per individual is entirely possible.
At UHY Ross Brooke, we have specialists in company administration, so if you would like to discuss whether this is an option for your business, please get in touch.