Tax efficient withdrawal (Closing ltd company)

[biggie]

I know this has been asked a few times but just wanted to confirm my thinking. Currently converting over to the dark side as a premie due to market conditions and I will be a higher rate tax payer.

Need assistance with below...

As an example below I have some funds in ltd co and would like the best method of withdrawing the remaining funds: Ideally I would like to close the company.

I have £160 k (after paying corp tax , vat etc)

Option A: Declare as div
25% tax due
withdraw= 120k

Option B: Liquidation (MVL)
ET Granted @10%
10%
3k costs
withdraw= 141k


Anything I have missed ? Also what are the time scales for above.

[Greg@CapitalCity]

Hi,

Yep, broadly looks right to me.

(a) Dividend option - Timing is whenever suits you for making the final dividend payment. The tax (25% of £160k = 40k) is payable by 31 Jan 2014.

(b) MVL option - Provided you are eligible for ER, then this is your best option. Once your final trading accounts have been prepared and all taxes have been paid, the MVL itself will take 1-2 weeks. Capital gains tax payable (provided you have no capital losses to offset, and no other capital gains) will be (160k - 3k - 10.6k) x 10% = 16k. This will be payable by 31 Jan 2014.

[jamesbrown]

Not an expert on this, but CGT has an annual exemption - 10.6k, I think - so the reduced rate of 10% presumably applies to the eligible amount after subtracting the exemption. I think there's a restriction, too, in that the relief rate applies only to the amount earmarked for trading (e.g. as opposed to an amount used for investment) - not sure precisely how this is determined though. It would be worth searching the forum or using a site-specific Google search as I recall a few threads on this (before and after the new rules).

[Waldorf]

I have £160 k (after paying corp tax , vat etc)

Option A: Declare as div
25% tax due
withdraw= 120k

Option B: Liquidation (MVL)
ET Granted @10%
10%
3k costs
withdraw= 141k

Anything I have missed ? Also what are the time scales for above.

If you declare a dividend of £160K, this is equivalent to £177,777 gross - so even if you have no other income, you will be paying some tax at the very high rate of 50%, the dividend rate is 36.1% of the net dividend or 42.5% of the gross.

So be careful, your estimate for tax is a bit low, you will have to calculate what other income you expect before calculating how much of your income has broached the 50% rate.

Note that the 50% rate is being reduced to 45% in April 2013.

As for the liquidation route, there has been some discussion whether yo would get ER as your cash pile is quite high.

Speak to your accountant.

[Waldorf]

Hi,

Yep, broadly looks right to me.

(a) Dividend option - Timing is whenever suits you for making the final dividend payment. The tax (25% of £160k = 40k) is payable by 31 Jan 2014.

(b) MVL option - Provided you are eligible for ER, then this is your best option. Once your final trading accounts have been prepared and all taxes have been paid, the MVL itself will take 1-2 weeks. Capital gains tax payable (provided you have no capital losses to offset, and no other capital gains) will be (160k - 3k - 10.6k) x 10% = 16k. This will be payable by 31 Jan 2014.

Greg - you haven't brought up the 50% tax rate and the potential that the OP would not qualify for ER!

[sbakoola]

As for the liquidation route, there has been some discussion whether yo would get ER as your cash pile is quite high.
Speak to your accountant.

I have a very similar problem, I have around £180k in my Limited business account and wish to close it in the next 4 months, can anyone recommend me a good tax advisor to see how I can become eligible for the 10% ER ? My accountant is 'one of the big ones' for IT contractors with my office in central london, they got actual Bobs to do my accounts a while back (they shipped them to london from india on the cheap_ and when I asked questions about such things as ER they bleated on about 'money laundering compliance' etc. basically they were clueless....

So if you can recommend a tax advisor who can help me extract the £180k out of the business account at ER 10% or develop a strategy for doing so then I would be most grateful. note: I'm aware of things like the non-trading profit % of money in the business account hmrc rule of thumb etc. and I mean a proper strategy i.e. not advice such as 'quitting my current contract to go permie for 5 months to make hmrc see the £180k business account diminish over time as I slowly draw money out from it with no trading income coming in ....'.

your help and advise is appreciated.

[Greg@CapitalCity]

Greg - you haven't brought up the 50% tax rate and the potential that the OP would not qualify for ER!

Jeez, Waldorf - ease up. I was known to make a mistake once, but it was a while ago and nobody could prove it anyway True, I missed the 50% tax rate, but didn't really give it too much thought as Option B looked a lot better. Please accept my apologies in this regard. You'll note regarding ER that I said "Provided you are eligible for ER..." - who says the OP will not qualify for it? Here's my view on this;

A large cash balance in itself does not mean the company ceases to be a trading company - whether its a cash surplus of £50k, £150k, or £300k. A company’s trading status is considered by reviewing its activities "in the round". This means considering things like income from non-trading activities, expenses incurred or time spent by officers and employees of the company in undertaking its activities, the company’s history etc. I think that if investment or non-trading activities are shown to be more than about 20% of total activities then you can take the view that investment activity is substantial and so the company ceases to be a trading company.

So lets look at the asset base first. How many PSC's have cash in bank that makes up at least 20% of total assets....probably all of them, so does this make all PSC's investment companies - no, not 'in the round'. So lets look at another test. Does total management time exceed 20% in looking after business investments. Assuming the OP worked 40hrs a week, did they spend more than 8hrs a week looking after their company investments - probably not. How about income? Does more than 20% of the company income come from investments? No (at least, not while the company is trading).

So if you look at a typical contractor company 'in the round', and consider the OP who spent x years working hard as a TRADING company - if the OP liquidates the company in an orderly way in an acceptable time frame after they raise their last invoice, it will, in my opinion, be VERY hard for the HMRC to deny ER regardless of the cash reserves held.

Of course, each client is different, and if there is deviation from the "typical contractor company" scenario, consult the services of an specialist contractor accountant

[centurian]

Greg - you haven't brought up the 50% tax rate and the potential that the OP would not qualify for ER!

Not to mention that if the OP receives any other earnings for the rest of the year (going permie etc.), then every penny of those earnings will be taxed at 50%.

And of course, remember that if you go over 100K (which the OP definately will), you hit the 60% marginal tax band as well due to the loss of the personal allowance.

Liquidation is definately the way to go - even if you can't claim ER, at least you can prevent burning up the allowances in the various tax bands.

[Greg@CapitalCity]

....then every penny of those earnings will be taxed at 50%.

Hi centurian, I think you're assuming the salary from the new position would be taxed after the dividend payout? Dividends are taxed last, so its most likely some of the OP's new permanent salary will be taxed at 20%, and the rest at 40%.

[rehanahmed]

HI Biggie

Your calculations do look right.

Closing the company through an MVL will definitely save you a substantial amount of Tax - it is something that we are doing for a number of clients now.

You will need to make sure that your accountant mentions this when he submits your Self assessment for this year in January 2014.

It is then when your £16,000 bill will be due.

Prior to this you will need to make sure all the companies debts have been verified and if necessary paid off aswell otherwise they will be paid through the £160K sitting in the account.

Your accountant will also need to submit final returns to companies house and HMRC when you decide to close up.

The procedure is relatively straight forward. If you havent already got an insolvency practice to deal with this, do send me a message and we can discuss how we can assist in placing the company into an MVL.

Thanks

Ray

Mod note: Hi Ray, if you represent a company, admin can change your login to [email protected].