Cash rich, profit poor - getting cash out

Getting cash out of ltd co

Didn't find your answer?

Client has £130k of goodwill on incorporation. Under current accounting standards this must be amortised at around 10 years. This means the client will be cash rich and profit poor.

Obviously you need profits to declare dividends but the client is keen to get his hands on the cash. Can I do a capital reduction (huge share premium reserve)?

In an ideal world the valuation on incorporation would have been lower...

Replies (5)

Please login or register to join the discussion.

By johngroganjga
30th Oct 2018 15:12

From whom did the company acquire its goodwill, and how did it pay for it?

Thanks (0)
Replying to johngroganjga:
avatar
By Harrison88
30th Oct 2018 15:22

Goodwill on incorporation based on a valuation (not incorporated by me). Low tangible assets as most of the operating costs are staff. Paid for primarily by shares so there is a large share premium reserve. Rest by loan to director which has now been fully repaid to take advantage of the annual exemption.

I'm thinking special resolution to convert the share premium to reserves but want to make sure I'm not going to trip up on anything.

Thanks (0)
Replying to Harrison88:
By johngroganjga
30th Oct 2018 15:57

Then the problem is the advice to pay for the goodwill by issuing shares. The easiest thing in the world would have been to credit the goodwill to a loan account which he could have been happily still drawing.

Thanks (1)
Replying to johngroganjga:
avatar
By Harrison88
30th Oct 2018 16:09

Wouldn't it have suffered CGT? I thought Incorporation Relief is restricted by value of shares as a proportion of total consideration. If they had received it all as cash then the relief would have been lower.

Thanks (0)
avatar
By Tax Dragon
01st Nov 2018 06:56

Non-tax issues in this scenario are discussed at some length in Q3 Accounting TV.

I agree re s162 - unlike, presumably, John, not everyone can afford (or wants) to pay CGT on incorporation.

Thanks (0)