Early retirement and closing down company

[booms]

Hi all,


Broad question.


I’ve been contracting for a few years now but I’m considering giving it up and retiring early, possibly moving to another country or living and working somewhere else for a while. All very flexible.


By the time I wrap up in April or so I expect to have about £130k left in my business bank account.


Generally I’ve tried to keep any tax payments to an absolutely minimum, so I’ve only taken out around £15k/year (PA + dividend allowance), and I’ve used my full £40k pension allowance every year. I don’t need very much cash so I’m very flexible about the rate at which I can draw down.


Reading around it looks like if I genuinely intend to stop working in the UK, I’m not at risk of being accusing of Phoenix-ing (I’ve never closed a Ltd company before)


I’ve asked my accountant what to do, and his suggestion is to keep the company open indefinitely, and to continue paying the monthly fee to them. To give him some benefit of the doubt, if I was to continue drawing down a salary and dividends then it would be entirely reasonable to keep paying them. However, he’s a little uncomfortable with me continuing to draw a salary if I don’t have an active contract.


Especially as I’m so flexible about drawing down and closing the company, is there anything smart I can do here? The options as I see it are:


1) Keep the company open and draw down at £15k/year for the next 9 years or so. This is tax-free, but will mean ongoing fees to the accountant, which I estimate would be close to £10k over 9 years (and with no revenue to set it against) - so not a ‘free’ option. But it would mean I’d have 9 more qualifying years for state pension which I’ve not yet filled up

2) Dormancy - doesn’t really seem to fix any problems so can just exclude that

3) MVL - will cost around ~10%, so £13k or so in my example

4) Take out about £45k a year to use up the 7.5% dividend so wrapping things up in about 3 years - costs about £10000 probably what with tax/accountancy fees

5) Do something a bit exciting, like registering in the NHR tax scheme in Portugal and taking the whole thing out as a tax-free dividend


Any other angles I could be thinking of here?

[Maslins]

When you have basic rate scope to get dividends at 7.5%, it makes sense to do that over an MVL. However, if you move overseas to work, and continue to drip feed dividends (potentially and salary as well), then this would almost certainly be taxable wherever you move to. If you'll be earning a big salary wherever you move to, this could be significant, and is one reason why an MVL might appeal.

[WordIsBond]

Some might argue that a salary is not defensible as 'for business purposes' if you aren't operating anymore. I'm not sure why that would matter much if you are not claiming it for Corporation Tax purposes, or why HMRC would be bothered to pursue / dispute it. So I assume you'd have no real problems on that front.

You can buy extra years of state pension eligibility if you quit working, it will cost you less than £800 per year to keep building your eligibility. That's a no-brainer if you expect to live past state pension age, that £700+ will be paid off in less than three years of collecting your pension. I don't know what an accountant would charge you to keep it running with just salary and pension but I'd guess the Class 3 NICs would be cheaper or comparable. So the state pension consideration shouldn't drive this for you.

[jamesbrown]

Hi all,
5) Do something a bit exciting, like registering in the NHR tax scheme in Portugal and taking the whole thing out as a tax-free dividend

Probably not that. It's much harder than you think. Moving overseas and paying low tax on money earned (or unearned) overseas is one thing; that's relatively easy. However, paying low tax on money earned in the UK and distributed to you while you're temporarily non-resident is another thing entirely. FA 2013 tightened this up for dividends, much like capital gains, where a 5-year rule already existed. Essentially, unless you're non-resident for more than five full tax years, you'll pay full UK tax on the dividends you receive from a UK company ("pre-departure profits") in the year you return. The statutory residence test is a lot harder now too. So, if you're leaving, you'd better be leaving properly, otherwise you'll be in for a nasty surprise a few years down the line...

[jamesbrown]

When you have basic rate scope to get dividends at 7.5%, it makes sense to do that over an MVL. However, if you move overseas to work, and continue to drip feed dividends (potentially and salary as well), then this would almost certainly be taxable wherever you move to.

And quite possibly in the UK too, if the OP returns within five years

[jamesbrown]

Some might argue that a salary is not defensible as 'for business purposes' if you aren't operating anymore. I'm not sure why that would matter much if you are not claiming it for Corporation Tax purposes, or why HMRC would be bothered to pursue / dispute it. So I assume you'd have no real problems on that front.

I expect the concern here is more about whether a salary is, in fact, a dividend, given that there is no trade going on, nothing being done, so no salary to be earned. I think it could be a tough sell. If it looks like a distribution and smells like a distribution, it's probably a distribution.

[WordIsBond]

I expect the concern here is more about whether a salary is, in fact, a dividend, given that there is no trade going on, nothing being done, so no salary to be earned. I think it could be a tough sell. If it looks like a distribution and smells like a distribution, it's probably a distribution.

First, I doubt HMRC would ever care. We're talking about £6K a year. From the company perspective, it's a loss for the company, but since no Corporation Tax is being reclaimed or lost in any way by HMRC, I doubt they'd care. From the employee perspective, it will be taxable income either way, it just means his first £6K would be salary instead of dividend, so no impact on taxation. If he started up the company again and tried to use carried-forward losses, they might care about that, but otherwise I'd be very surprised.

Second, he's still a director, still has liability, and still has to review and sign off accounts. That should be worth something as a director's stipend, which is earnings.

Third, this is so easily fixed. All he has to do is keep his LinkedIn profile updated and send out a few CVs a year and he can claim he's still looking for contracts, he just hasn't found one that fits his current situation. If someone would just offer him one that paid £250 / hour for 5 hours a week working off-site, he'd jump at it! And he's been looking for something just like that but nothing has come up. Ok, that's a little extreme but the point is he doesn't have to be doing a lot to justify keeping the company open and paying himself enough to earn state pension eligibility. He's not looking to justify an annual salary of £600,000, he's looking to justify £6,000. It doesn't take much.

All that said, if it were me I'd probably just close down and take ER before they withdraw it, save the annual accountancy fees, and pay voluntary Class 3 NIC every year.

[jamesbrown]

First, I doubt HMRC would ever care. We're talking about £6K a year. From the company perspective, it's a loss for the company, but since no Corporation Tax is being reclaimed or lost in any way by HMRC, I doubt they'd care. From the employee perspective, it will be taxable income either way, it just means his first £6K would be salary instead of dividend, so no impact on taxation. If he started up the company again and tried to use carried-forward losses, they might care about that, but otherwise I'd be very surprised.

Second, he's still a director, still has liability, and still has to review and sign off accounts. That should be worth something as a director's stipend, which is earnings.

Third, this is so easily fixed. All he has to do is keep his LinkedIn profile updated and send out a few CVs a year and he can claim he's still looking for contracts, he just hasn't found one that fits his current situation. If someone would just offer him one that paid £250 / hour for 5 hours a week working off-site, he'd jump at it! And he's been looking for something just like that but nothing has come up. Ok, that's a little extreme but the point is he doesn't have to be doing a lot to justify keeping the company open and paying himself enough to earn state pension eligibility. He's not looking to justify an annual salary of £600,000, he's looking to justify £6,000. It doesn't take much.

All that said, if it were me I'd probably just close down and take ER before they withdraw it, save the annual accountancy fees, and pay voluntary Class 3 NIC every year.

I don’t think it’s that complicated. If there’s nothing to gain from taking a salary versus a dividend (about which there is no question), then why take a salary? Rhetorical question.

[SandyD]

Hi all,


Broad question.


I’ve been contracting for a few years now but I’m considering giving it up and retiring early, possibly moving to another country or living and working somewhere else for a while. All very flexible.


By the time I wrap up in April or so I expect to have about £130k left in my business bank account.


Generally I’ve tried to keep any tax payments to an absolutely minimum, so I’ve only taken out around £15k/year (PA + dividend allowance), and I’ve used my full £40k pension allowance every year. I don’t need very much cash so I’m very flexible about the rate at which I can draw down.


Reading around it looks like if I genuinely intend to stop working in the UK, I’m not at risk of being accusing of Phoenix-ing (I’ve never closed a Ltd company before)


I’ve asked my accountant what to do, and his suggestion is to keep the company open indefinitely, and to continue paying the monthly fee to them. To give him some benefit of the doubt, if I was to continue drawing down a salary and dividends then it would be entirely reasonable to keep paying them. However, he’s a little uncomfortable with me continuing to draw a salary if I don’t have an active contract.


Especially as I’m so flexible about drawing down and closing the company, is there anything smart I can do here? The options as I see it are:


1) Keep the company open and draw down at £15k/year for the next 9 years or so. This is tax-free, but will mean ongoing fees to the accountant, which I estimate would be close to £10k over 9 years (and with no revenue to set it against) - so not a ‘free’ option. But it would mean I’d have 9 more qualifying years for state pension which I’ve not yet filled up

2) Dormancy - doesn’t really seem to fix any problems so can just exclude that

3) MVL - will cost around ~10%, so £13k or so in my example

4) Take out about £45k a year to use up the 7.5% dividend so wrapping things up in about 3 years - costs about £10000 probably what with tax/accountancy fees

5) Do something a bit exciting, like registering in the NHR tax scheme in Portugal and taking the whole thing out as a tax-free dividend


Any other angles I could be thinking of here?

Very interesting, am thinking of this too, hope there will be some useful answers.
re the accountancy fees, btw there small/individual are accountants that will charge you % of your rate, so if you are not working, not taking complex expenses, etc, they will charge you smaller amount, this makes sense if you keep the company working but not trading as not complicated to submit EOY...

[Craig@Clarity]

If you're thinking about upping sticks and leaving the UK for good and giving up on contracting here, I'd suggest going down the MVL route, taking the 10% hit on CGT and be done with it rather than drip feeding dividends/salary over a number of years to run the retained profits down. If you drip feed, you have to consider the tax implications in the country you reside in as there's potential you could be paying more tax in that country. Perhaps speak to an IFA about a final employer pension contribution (depending on if you want to tie the cash up in a pension pot or not) before MVL.

Not entirely convinced on the motives from your accountant to keep the company ticking over whilst paying them a monthly fee. If you have a salary in the company, you're going to have to continue to file RTI monthly which I'm guessing they would do or you could invest in some basic payroll software and do this yourself. Be a lot cheaper. But as I say, if it was me, I'd consider the MVL route. No kick backs involved but purely based on level of service, relationship in the past and reputation, I would speak to Chris at Maslins.