A COMPANY HAS TRADED FOR 10 YEARS AND HAVE ACCUMULATED PROFITS OF £500,000 . THE COMPANY WILL CEASE TRADING AND THE DIRECTOR/SHAREHOLDER WISHES TO TAKE A YEARLY DIVIDEND OF AROUND £40,000 P.A. FOR THE NEXT 12 YEARS. HE HAS NO OTHER INCOME AND THEREFORE EXPECT TO PAY TAX AT 7.5% ON ( 40,000-2,000 - PERSONAL ALLOWANCE).
DOES THE CESSATION OF TRADING HAVE ANY EFFECT ON THE ABOVE OR IS THE ABOVE CALCULATION CORRECT?
YOUR INPUT WILL BE GREATLY APPRECIATED.
Replies (26)
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Possible to do , and calculation seems reasonable,but he does have a touching faith that corporate tax and tax on dividends will remain the same as they now are for the next ten years;past history might differ with such a viewpoint.
Why does he not consider a formal winding up of the company as an alternative option, saves 10 years of accountancy fees?
yOUR cAPS lOCK IS ON.
Like Tim, I foresee further changes in rates of taxation of dividends. That £5000 dividend allowance - so obviously a sop thrown to the masses on the introduction of dividend rates of tax - didn't last long, did it?
It was not in the Finance Bill due to time constraints. There is still plenty of time for it to reappear by 6 April 2018.
Lion
That is close to an "I agree with Nick" moment except my name is neither Nick nor Tim, it is Donald.
I am quite used to getting called the wrong name, my father used to call me Patrick (my cousin) but at least better than my three sisters, he alternated their name use all the time, used to get very confusing.
I'm sure the dividend allowance will go completely, for no other reason than HMRC's online systems cannot cope with it.
DJKL suggests that client should consider formal winding up of the Co. The way I see it is that the cost of winding up by appointing an IPA will be huge , maybe around £10K if I am not mistaken (due to size of the net worth of the business).
However, if the Co drew only div for the next 12 yrs would this not jeopardise ER that the client can get now since the CO is no longer trading? The ER rate is 10% which is higher than 7.5% div rate (assuming regime does not change) .
What will be the accounting costs for ten years. Then there is the hassles as the owner gets older. And yes, ER has a limited shelf life, and the arrangement trusts there will be no adverse changes in legislation.
The bird in the hand wind up, monies say salted away within multiple years ISA investments/similar is appealing, especially when access to the funds is wanted, albeit over a number of years.
I think these are always bespoke decisions, I have a client with nearer £3m in a company with no thought of removing the funds, in fact they may never take dividends- excess funds are in a share portfolio of listed investments, dividends earned by the company currently accumulate tax free, in their case, where the owners have no need/wish for the funds, leaving alone seems fine, but where funds access is part of the plan sometimes waiting is not the best option.
Edit: also if say main liquid funds are tied within the company, and on death there would be an IHT bill, the company shares forming part of the estate, not having access to the funds does need considered.
DJKL suggests that client should consider formal winding up of the Co. The way I see it is that the cost of winding up by appointing an IPA will be huge , maybe around £10K if I am not mistaken (due to size of the net worth of the business).
Cost shouldn't be anywhere near that. If the balance sheet is/can be simplified right down to just cash, no other assets, and no liabilities, then companies like MVL Online (I'm biased as 50% owner) will do it for a grand plus disbursements. With ~£500k net assets the bond would be a little larger than some more modest cases, but overall cost would still be under £2k (inc VAT and all associated disbursements).
Worth checking that they'd qualify for entrepreneurs relief etc, but assuming so, it'd certainly seem a better option.
The way I see it is that the cost of winding up by appointing an IPA will be huge , maybe around £10K if I am not mistaken
You are mistaken
I agree. MVL now. Bird in the hand. You can shop around. I would be surprised if you had to pay £10k
I too would go for a MVL now. If it all cash try talking to a number of insolvency practioners and you may find the fee reduces.
Accountancy fees, changes in taxation and other costs are all unknown.
As I say to clients cash in the hand is better than a promise to pay at a later date even if the amount is less.
I would equally have voted for the formal liquidation. Assuming the company affairs are now very simple - this should cost about £3000, and the extraction is then at 10% using ER. Slightly more expensive upfront, but then funds are freed up immediately.
Another viewpoint is that the £500k sitting in the company is effectively losing your client money, because it is difficult to use it for anything that provides a good return. Better to have funds in own hands, and invested somewhere useful.
If he hasn't ceased trade yet - an extended option is to do a maximum pension funding from the company, and wind up the balance.
I would go for urgency for the same reason as the others, but also - I suspect that the longer he holds funds without trading, the more risk of challenge to use of ER in the future.
I'd even suggest to the client take the tax bill on the chin and extract profits as short as over a two year period - don't know how old they are but you never know what tomorrow may bring. Spend now and enjoy
I'd even suggest to the client take the tax bill on the chin and extract profits as short as over a two year period - don't know how old they are but you never know what tomorrow may bring. Spend now and enjoy
I'd even suggest to the client take the tax bill on the chin and extract profits as short as over a two year period - don't know how old they are but you never know what tomorrow may bring. Spend now and enjoy
How's your pension provision, muggsy?
If the company choose to be wound up . Will the distribution be subject to capital gains tax ? at the rates of 18% and 28% ?
Oh Christ. *facepalm*
Consider ER assuming did not stop trading over three years before, and the question suggests still trading:
"one or more assets consisting of shares in, or securities of, your ‘personal company’ (see below) – the shares must be disposed of either (i) while the company is a trading company or, where you hold shares in a holding company of a group, the group of companies is a trading group or, (ii) within 3 years from the date it ceased to be either a trading company or a member of a trading group (see Example 3 below)"
https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-se...