Resigning as director of Ltd, whilst self-employed

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Hi all

Learning lots on the site, and hoping someone can help with some advice on my specific situation.

I've been self-employed since 2008 as a web designer, and recently started a Ltd company with a web developer friend in January 2020 (on the advice of his accountant, being the best way to setup for future joint projects working together) we completed one project for a client, over 6 months, finishing in June. Unfortunately the work balance between us was quite skewed and I've decided I would prefer to just continue my own work as a sole trader, rather than balancing my time between my sole trader clients and joint clients in the Ltd business.

We have approximately £20k in the business account from the 6 month project, and I've made him aware of my decision to want to leave the joint business. He wishes to keep the Ltd company running, and will use freelancers to fill in the skills he doesn't have. I'm now unsure on the best way to release my share of the funds in the business, in the most straightforward way, and how that would effect my sole trader tax returns.

My friend, the other director, uses the same accountant for his own Ltd as well as this joint Ltd, so I'm sure they will understandbly advising on the best outcome for him as their client, whilst I've always completed my own sole trader accounts myself on a cash basis as they've been very straightforward.

If anyone can give me some advice on the options available that would be really appreciated - or if it's something I should now disucss with a local accountant then happy to do that too, just keen to get things wrapped up so we can both move on.

Thanks for your time! 

Replies (24)

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Scalloway Castle
By scalloway
17th Aug 2020 13:59

You could take your share of profit as salary which would mean the business registering for PAYE. If your co-shareholder agrees you could take it out as dividend.

Neither option would directly affect your sole trader status but there would be a tax liability for both.

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Replying to scalloway:
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By limbo
17th Aug 2020 14:09

Thanks for your quick reply, he has already suggested taking the payment as a dividend - would this be declared as income to my sole trader business in this instance?

Do you know which would be the most tax efficient way of approaching this for the £10k (50% share)?

My sole trader business has been running at an average of £35k turnover and £28k net for the past few years, worried that the additional £10k this year would push me upto the higher rate tax rate?

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Replying to limbo:
RLI
By lionofludesch
17th Aug 2020 14:46

It wouldn't be your business income. It would be your income though.

Your income would still be below the higher rate threshold. There'd be no extra tax on the first £2000 (assuming you've told us everything) and 7½% on the rest, so £600.

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Replying to lionofludesch:
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By limbo
17th Aug 2020 15:48

Quote:

It wouldn't be your business income. It would be your income though.

Your income would still be below the higher rate threshold. There'd be no extra tax on the first £2000 (assuming you've told us everything) and 7½% on the rest, so £600.

That's great, thank you - assuming I took the dividend as one payment (will be just short of £10k) in September 2020 for example, just to be sure I would then declare this dividend amount on my 2020/21 self assessment?

Would it be easier if I arranged the dividend payment and then formally handed in my resignation from the business, or would it be part of the resignation process?

Thanks so much for all the replies, it's really appreciated.

Thanks (0)
Replying to limbo:
Scalloway Castle
By scalloway
17th Aug 2020 15:55

Yes declare this dividend amount on your 2020/21 self assessment.

If you are disposing of your shares when you leave the business you should hold on to them until the dividend is paid. You can resign as a director at any time.

Thanks (1)
Replying to limbo:
RLI
By lionofludesch
17th Aug 2020 16:08

Quote:

Quote:

It wouldn't be your business income. It would be your income though.

Your income would still be below the higher rate threshold. There'd be no extra tax on the first £2000 (assuming you've told us everything) and 7½% on the rest, so £600.

That's great, thank you - assuming I took the dividend as one payment (will be just short of £10k) in September 2020 for example, just to be sure I would then declare this dividend amount on my 2020/21 self assessment?

Would it be easier if I arranged the dividend payment and then formally handed in my resignation from the business, or would it be part of the resignation process?

Thanks so much for all the replies, it's really appreciated.

Resigning as a director, taking a dividend and selling your shares are three different issues - although the continuing director might want to make one a condition of the others.

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Replying to lionofludesch:
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By limbo
17th Aug 2020 16:16

It's very amicable, so we're just looking at the fairest and simplest way for us both to proceed.

It sounds like the best process would be to:

- Ask the accountant to calculate the corporation tax that the business owes based on the profits generated over the 6 month period.

- Divide the remaining amount and withdraw my 50% as a dividend from the business.

- Resign from the business, and sell my 50% shares for the nominal fee we agreed/used when forming the Ltd company.

Does that sound sensible?
Thanks again for all the help!

Thanks (0)
Replying to limbo:
RLI
By lionofludesch
17th Aug 2020 16:44

Quote:

It's very amicable, so we're just looking at the fairest and simplest way for us both to proceed.

It sounds like the best process would be to:

- Ask the accountant to calculate the corporation tax that the business owes based on the profits generated over the 6 month period.

- Divide the remaining amount and withdraw my 50% as a dividend from the business.

- Resign from the business, and sell my 50% shares for the nominal fee we agreed/used when forming the Ltd company.

Does that sound sensible?
Thanks again for all the help!

Well, maybe. Do you have the same class of shares as your co-director? If so, he'll need to take whatever dividend you take.

Possible solutions ....

- he lends his dividend back to the company, though he'll be stuck with the tax bill.

- you change your shares to a different class, though you'll be stuck with an accountancy bill.

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Replying to lionofludesch:
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By limbo
17th Aug 2020 16:55

I've just reviewed the company formation documents:

"It was noted that the initial share capital of the Company was £10.00 divided into 10 Ordinary shares of £1.00 each fully paid"

We each have:
"5 Ordinary £1.00 shares of £1.00 each fully paid"

Would it be a simpler process if he wasn't looking to continue with the business and we were closing the Ltd company down altogether?

Thanks again

Thanks (0)
Replying to limbo:
RLI
By lionofludesch
17th Aug 2020 17:13

Quote:

I've just reviewed the company formation documents:

"It was noted that the initial share capital of the Company was £10.00 divided into 10 Ordinary shares of £1.00 each fully paid"

We each have:
"5 Ordinary £1.00 shares of £1.00 each fully paid"

Would it be a simpler process if he wasn't looking to continue with the business and we were closing the Ltd company down altogether?

Thanks again

Might be

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Replying to lionofludesch:
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By limbo
17th Aug 2020 18:05

If the other director and 50% shareholder of the business agreed to voluntarily wind up the business, am I right in thinking we may be eligible for entrepreneur's tax relief at 10% - assuming we met all the criteria, as the assets would be below the £25k mark?

Thanks again for your time

Thanks (1)
Replying to limbo:
RLI
By lionofludesch
17th Aug 2020 18:34

Quote:

If the other director and 50% shareholder of the business agreed to voluntarily wind up the business, am I right in thinking we may be eligible for entrepreneur's tax relief at 10% - assuming we met all the criteria, as the assets would be below the £25k mark?

Thanks again for your time

Sure - but the criteria include not trading in the same or a similar trade for two years. Might be better to pay the £600 dividend tax.

Thanks (1)
Replying to lionofludesch:
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By limbo
17th Aug 2020 16:16

It's very amicable, so we're just looking at the fairest and simplest way for us both to proceed.

It sounds like the best process would be to:

- Ask the accountant to calculate the corporation tax that the business owes based on the profits generated over the 6 month period.

- Divide the remaining amount and withdraw my 50% as a dividend from the business.

- Resign from the business, and sell my 50% shares for the nominal fee we agreed/used when forming the Ltd company.

Does that sound sensible?
Thanks again for all the help!

Thanks (0)
Replying to limbo:
Scalloway Castle
By scalloway
17th Aug 2020 14:49

A dividend is personal income, not part of your sole trader income. It needs to declared on your self assessment. You have a £2,000 tax free allowance for dividends and the balance will be taxed at 20%. Higher rate tax kicks in for income over £50,000. In my opinion that is the most tax efficient method.

You will need to decide what is going to happen to your shares in the business going forward.

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Replying to scalloway:
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By Sarah Z
17th Aug 2020 15:15

The dividend tax rate on basic rate tax payers is 7.5%

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Replying to scalloway:
RLI
By lionofludesch
17th Aug 2020 15:31

Jeez, Scallers, I'd already worked the tax out for him.

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By Matrix
17th Aug 2020 15:57

You would also need to agree a value for your shares. Which may be negligible after withdrawing the dividend. There may be better ways of doing this but if you are happy with the amount you receive and you both agree then you save professional fees.

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By User deleted
17th Aug 2020 23:37

If you receiving the dividends would mean that you will be disposing your shares, final dividends will be subject to CGT instead of income tax. From what you have mentioned, it seems like your share of dividends will be within your CGT allowance (depending on other circumstances outside the company) so you won't have to pay any CGT.

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Replying to User deleted:
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By limbo
18th Aug 2020 00:02

Quote:

If you receiving the dividends would mean that you will be disposing your shares, final dividends will be subject to CGT instead of income tax. From what you have mentioned, it seems like your share of dividends will be within your CGT allowance (depending on other circumstances outside the company) so you won't have to pay any CGT.

Thanks for your reply - would this be the case regardless of whether my co-director decided to continue running the business of winding it up?

And, yes from what I've read on CGT it would be within my allowance, no other CGT payable for the accounting year.

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Replying to limbo:
RLI
By lionofludesch
18th Aug 2020 05:04

And what do you both intend to do in the future ?

See my post at 18:34 yesterday. Are you prepared to stay out of this trade for two years to save £600 apiece in tax?

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Replying to limbo:
RLI
By lionofludesch
18th Aug 2020 08:19

Duplicated

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Replying to lionofludesch:
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By Matrix
18th Aug 2020 08:28

If the reserves are less than £25k then a MVL would not be required so the 2 year limitation shouldn’t apply.

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Replying to lionofludesch:
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By limbo
18th Aug 2020 11:18

No, that wouldn't be an option then, thanks for the info - looks like dividend is the best way to proceed, thanks for all your replies.

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Replying to User deleted:
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By Matrix
18th Aug 2020 08:27

Quote:

final dividends will be subject to CGT instead of income tax

Careful, you do not know that the requirements for a capital distribution have been met.

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