Closing my limited company for tax purposes

[James McDonagh]

Hi there,

I have a desire to pay off my mortgage ASAP.

I have £60k+ in my company account. I would like to get that money out of the company to pay into the mortgage.

However, my accountant is telling me that the maximum I can only take approx £40k out of the business every year, without incurring 40% tax.

I have been running my contractor limited company for about 7 years.

My questions are:

1: Are there benefits to closing this company from a tax perspective, as opposed to just taking the money out and accepting the tax hit.

2: Are there any downsides to this approach (closing the company).

3: On the £60k+ figure how much would I save (if anything)

thanks for your help

[Crossroads]

1: Yes, but at the sums involved, not really worth it, depending upon your circumstances and there is always a flipside to any benefit.

2: There are guidelines to prevent you forming a phoenix company. Are you planning on taking a holiday? If not, how are you going to contract once your company is closed? An umbrella would soon wipe out any saving.

3: Roughly, you would pay 10% CGT, assuming ESC C16 were to be granted. So if that 60k is net profit, you would walk away with 54k, versus 45k as a dividend (assuming all falls into your 40% band).

So you're going to save £9k. Out of that 9k comes:
- any additional accountancy fees
- new company startup (inc insurances etc)
- hassle of paperwork

If you go the "phoenix company" route, then the tax inspector might decide to reclassify your capital distribution as income, and you'll end up paying all the tax anyway.

IMHO not worth it for £9k, unless you are going to be taking a break.

[ASB]

3: Roughly, you would pay 10% CGT, assuming ESC C16 were to be granted. So if that 60k is net profit, you would walk away with 54k, versus 45k as a dividend (assuming all falls into your 40% band).

Of course it is impossible to tell from the info given but I think your assumption 3 may be flawed. You seem to be assuming that either there is 40k of income from elsewhere or there is 60k after the 40k has been taken. This may be right, but if there is a total of 60k available (and getting ESCC16) then:-

60k - 40k = 20k remaining shareholders funds
10k after using CGT allowance @: 10% (or 18% depending on which rate would apply) = 1,000 or 1,800 tax.

As a dividend then it's 20k @ 22.5% = 4,500.

So the max saving would be 3,500.

Although ESC16 has been widely used, and is suggested as a strategy by some it seems to me this is likely to be something HMIT may perceive as abuse and clamp down on - they have the powers since it is in the gift of the inspector and In principle ESCC16 is only supposed to apply when leaving a business stream.

In HMIT eyes one is first reclassifying earned income as investment income and further reclassifying the bit that was left over as capital appreciation. With the focus on income shifting in general they may start to take a harder line.

[TheFaQQer]

Chances of getting an ESC16 through and paying out before the end of the tax year are pretty slim, I would imagine.

If you fall into next year's CGT rules, then you only pay the 10% if you aren't intending to setup another business.

[ratewhore]

If you fall into next year's CGT rules, then you only pay the 10% if you aren't intending to setup another business.

eh? I must have missed that bit?

[Crossroads]

eh? I must have missed that bit?

Same as prior to the CGT changes really.

[Ruprect]

Same as prior to the CGT changes really.

No:

Before april:

100k profit.

x 25% for taper relief

=25k captial gain

- 9.2k annual allowance

= 15.8k gain subject to tax

15.8k * 40% tax rate = 6.32k tax due.

After April

100k profit.

- 9.2k annual allowance

= 90.8k gain subject to tax

90.8k * 10% tax rate = 9.08k tax due.

so HMRC have increased their tax take by nearly 50%.

[Ruprect]

(assuming you haven't used up your CGT allowance)