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Strategy for retiring Limited Company owner?

I need some thoughts on strategies for a limited company owner who will sell up and retire soon.

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Can anyone give me a few pointers to consider as I haven't dealt with someone who will be retiring in a few years time. They are a one-man band with a small limited company with a turnover of about £60k and profits of £30k of which he needs to draw £20k pa dividends to live on. He is a 20% taxpayer with no other income. He is thinking of selling up in three or four years time - they may get £60k on the sale of the business, including assets which are written down to £0 in the accounts but probably actually worth something. When they retire it is likely that their private pension will be very small so with the state pension may get about £20k per annum. There is about £30k in the company bank accounts.

I just need pointers at what to look at really (rather than "how long is a piece of string" comments!) based on the limited  information above. 

Thanks for any help.

 

Replies (16)

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DougScott
By Dougscott
25th Jun 2022 10:45

So for example does building up as much money as possible in the company and then paying a large pension contribution prior to sale make sense or are there downsides?

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Replying to Dougscott:
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By Hugo Fair
25th Jun 2022 11:52

Alternatively, if pension not relevant for any reason, "building up as much money as possible in the company" might make it possible for any sale price to include a near 1:1 value of 'excess cash' on top - all of which means it is likely (subject to the usual conditions) to be liable to the reduced rate of CGT under BADR as a 'cheap' way of extracting the money?

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Replying to Dougscott:
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By David Ex
25th Jun 2022 12:12

Dougscott wrote:

… does building up as much money as possible in the company and then paying a large pension contribution prior to sale make sense or are there downsides?

No and yes.

The client needs to speak to an IFA to review pension arrangements.

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Replying to Dougscott:
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By Tax Dragon
25th Jun 2022 13:46

Wouldn't it be preferable from tax point of view (if pension investing is what he wants to do) to use the surplus cash to pay regular premiums (or premia, if it's a fund not a plan)?

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By Calculatorboy
25th Jun 2022 12:54

Purchaser will probably want goodwill only rather than purchase company . So company will have 90k cash less say 12k ct on 60k goodwill ie 78k cash
Assuming state pension is 10k , & private is also 10k
Just defer private pension and draw 40k div each year to max out basic rate , after year 2 apply for strike off .
If can't defer private pension reduce divs, it might take another year

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By Calculatorboy
25th Jun 2022 15:29

I doubt any purchaser would buy shares of micro company like that, more likely the company assets and goodwill, if he can defer private pension just max out dividends up to basic rate to clear out company cash,
With 30k bank + goodwill sale 60k( less ct)
should do it in 2 years or so then just strike off ..

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Replying to Calculatorboy:
paddle steamer
By DJKL
27th Jun 2022 16:08

Goodwill worth 60k?

Really?

This guy runs the company, applies the hours and its turnover is only 60k, once one puts a normalised salary in place of the 30k taken (presume plus NI pension etc) not sure one could get to goodwill being worth 60k. (well I certainly would not pay that unless it was say recurring accountancy fees etc)

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Replying to DJKL:
Melchett
By thestudyman
27th Jun 2022 22:56

I have to echo the above, it sounds like a job rather than a viable business. A market rate salary which a new owner will likely charge, will almost certainly wipe out any profits, most likely turning the profits into a loss.

I will be very surprised if the client gets any interest from buying a 60k revenue company. Any goodwill, or brand attachment, will disappear with the old owner.

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Replying to DJKL:
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By Calculatorboy
30th Jun 2022 00:43

That's what the post implied .if he can get that more power to him. Not for me to disadvantage client. Its clear the option is not for cgt advantage but simple drawdown as dividends and strike off..the cheapest option

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By Paul Crowley
26th Jun 2022 00:10

I thought the driving force of late in life pension planning was 40% tax relief when working, and 20% tax liability after retirement
The tax free bit is not huge

in a company the company saves CT, provided things fit, but pensioner still pays 20% on money coming out of the pension

I would think the 10% CGT is sort of useful but the CT has already been paid
Dividend tax is only 8.75% so may even be cheaper for a BR tax payer.

Best is to look at the options and do the maths, taking in the cost of an MVL if over the limit.

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Replying to Paul Crowley:
paddle steamer
By DJKL
27th Jun 2022 11:20

With a couple and 20,000 forecast pension income the company contributions could work well if the 20k is evenly split as there is a goodly bit of headroom to the two personal allowances and of course also the 25% tax free slice to take.

Problem is what happens if extra income regarding entitlements to benefits/pension additions etc, not an area I really understand . I watched a programme last night, "How safe is your pension" I think it was called which mentioned unclaimed entitlements re pensioners but gave no details what these were/how claimed etc.

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By JCresswellTax
27th Jun 2022 10:54

MVL

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Replying to JCresswellTax:
paddle steamer
By DJKL
27th Jun 2022 11:22

With the numbers bleeding out divs within basic rate band may well be cheaper.

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Replying to DJKL:
By JCresswellTax
27th Jun 2022 11:24

Perhaps but have you seen how cheap you can get an MVL these days!

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Replying to JCresswellTax:
paddle steamer
By DJKL
27th Jun 2022 15:45

Another race to the bottom?

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Replying to DJKL:
By JCresswellTax
27th Jun 2022 16:00

Yeah have seen them as little as £995 + VAT!

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