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Can client selling biz convert DLA to dividend

Client is selling business, can DLA be converted to dividend prior to sale with negative net assets

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A client is selling her business. It has traded well historically but the last two years has recorded losses. The net asset position is close to -£40k. 

She has taken cash from the business which is marked as a directors loan. This was previous advice (I advised to move to PAYE, which she has done). Thus she has an overdrawn DLA account of ~50k.

She has found a buyer and is working with them on a deal structure. 

She cannot convert DLA to dividends due to losses in the business; can she - just prior to sale - convert to dividends given that new buyer will inject cash into business, and moving forwards the business will carry significantly less costs? Or could she have agreement with new buyer that post-acquisition the DLA would be converted to dividend?

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RLI
By lionofludesch
27th Aug 2019 18:14

To pay a dividend, the company needs profits.

If the buyer sticks money into the company, profits will be unaffected.

Cash is unimportant if the dividend is intended to clear a DLA.

So I vote no.

However, why doesn't the buyer pay off her loan as part of the deal ?

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Replying to lionofludesch:
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By Jguttler
27th Aug 2019 18:41

That's a possibility; client concerned that it makes the deal too complex.

As I understand it:

Buyer reduces sale price by DLA amount (£50k) and clears it.
Buy thus gets £50k less for sale.

OR

If buyer converts DLA to salary prior to sale then tax liability of around £16k, deferred to Jan 21. Business gets back ~£7k on S455

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Replying to Jguttler:
RLI
By lionofludesch
27th Aug 2019 18:58

Jguttler wrote:

That's a possibility; client concerned that it makes the deal too complex.

No problem - client can repay the loan from the sale proceeds of her shares. Or simply take a salary and pay a boatload of tax.

To be honest, these deals are often about compromise. What's good for the buyer is usually bad for the vendor.

Who will blink first ? Who wants the deal more ?

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Replying to Jguttler:
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By Bobbo
28th Aug 2019 14:00

Jguttler wrote:

If buyer converts DLA to salary prior to sale then tax liability of around £16k, deferred to Jan 21. Business gets back ~£7k on S455

Why is the tax deferred to January 2021, if this is salary why is it not subject to PAYE immediately?

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Replying to Bobbo:
RLI
By lionofludesch
28th Aug 2019 14:36

Bobbo wrote:

Jguttler wrote:

If buyer converts DLA to salary prior to sale then tax liability of around £16k, deferred to Jan 21. Business gets back ~£7k on S455

Why is the tax deferred to January 2021, if this is salary why is it not subject to PAYE immediately?

It's something the OP hadn't thought of.

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By Accountant A
27th Aug 2019 18:14

It's "traded well historically" but has negative reserves?

What are the sales proceeds and ballpark gain on the sale, as it stands?

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Replying to Accountant A:
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By Jguttler
27th Aug 2019 18:33

Thank you - sale is expected to be in the region of £150k, she owns 60% of business. Setup (by her) 10 years ago, hence note on historic success but recent difficulties.

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By bernard michael
28th Aug 2019 10:13

What does the 40% shareholder think about the situation or is that the purchaser ?

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