Another Capital Distribution Question

Another Capital Distribution Question

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My client is a successful record producer who as traded via a limited company for several years of which he is the sole shareholder.

History has shown that he contrives to spend personally every penny the company earns thus somewhat defeating the purpose of incorporation.

After a profitable 18 months there is now over £500K sitting in the company bank accounts and my client has seen a residential property he wants to buy using this money.

He has sought my advice over the best way to extract the monies.

Apart from declaring a dividend and paying the 25% tax it occurs to me that a viable alternative would be to seek approval under ESC C16 and dissolve the company. All future earnings would be credited to the client as a sole trader and the company would immediately cease to trade. This would result in a 10% tax charge providing I get my skates on.

There are future royalty earnings to consider on contracts entered into by the limited company but I assume my client could buy the rights to these at a best estimate amount. He would also buy equipment at tax wdv, there are no other assets.

Can anyone see and pitfalls.

Euan, I expect a response, you have been most helpful in the past.

John Lewis

Replies (4)

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By geoffwolf
27th Oct 2007 19:56

large assets
You may well find that due to the size of the reserves HMRC will not allow the concession of ESC16.

The best route for speed of action too would seem to be a formal Members' Voluntary Liquidation.

The value of future royalties also needs to be tested in the market place. Therefore an interim distribution prior to 5 April 2008 may be required. which is another reason to go down the formal dissolution route.

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Euan's picture
By Euan MacLennan
29th Oct 2007 14:10

ESC C16
Thank you, John, for your comments, but I am not sure there is much I can add to the previous answers.

ESC C16 is not a guarantee that BATR applies - it is a guarantee only that the distribution will be treated as subject to CGT. If the company has been operating for somewhat longer than the minimum of 2 years to qualify for the 75% taper, I would hope that the £500K accumulated over the last 18 months would not invalidate that. You will certainly not fall foul of the new condition being imposed on granting ESC C16 that the assets and business are not to be transferred to another company as you are transferring to an individual. As Geoffrey says, a denial of ESC C16 can be circumvented by a members' voluntary liquidation. As Mark says, the possibility of a denial of BATR can be circumvented by delaying until after the 18% regime comes into force, which may or may not be 6th April 2008.

Your much bigger problem is the company's future royalty income and both the determination of the market value and the fact that CT will be payable on the profit on the sale of the contracts to the individual client.

Perhaps, keeping the company going, paying an income dividend and the higher rate tax of 25% of the dividend might end up being the best option.

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By gordonberry
02nd Nov 2007 14:33

other options
John, I would suggest that there are options and there are providers who specialise in such. However, I would prefer to discuss this directly with you by telephone. Please feel able to call me on 01592 267849.
If corporation tax were 20%, then another 25% on withdrawing the dividend, then that is equivalent to 40% tax. If, in this case, the profits are taxable at a higher rate of corporation tax, then we are actually talking closer to 48% tax. If IHT is an issue, then HMRC may want another 40% of the 52% you thought you had left there.
Give me a call if you would like a chat.

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By pauljohnston
02nd Nov 2007 16:35

Another option
John

Another option could be by using an employee benefit trust but without further information I can not help further. If you want to call me to discuss this further 01883 708090.

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