Taking dividends v's loan and salary??

Taking dividends v's loan and salary??

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Hi there

I'm hoping this is the right place to ask, if not please bare with me.  I have a client who wants to take a large sum out of the business to purchase a property.  Is it best to take some now and some after 6th April or take it all after the April cut off?  Would you advise to take it all as a dividend or split it into loans etc?  I would be really interested to hear your views and the cheapest way round the tax?

The money is available and there will be enough left to cover all business requriements and HRMC bills that are due.

Your thoughts would be most appreciated.

Kind regards

Clara

Replies (6)

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Man of Kent
By Kent accountant
28th Mar 2012 13:26

Need to know more

Hi Clara - its impossible to give an accurate detailed answer without knowing more details about your clients personal and business circumstances.

If you can't provide the services to your client, I would suggest you find someone who can but who won't pinch your client, rather they will act a specialist adviser.

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By Steve Knowles
28th Mar 2012 15:43

There may be potential to withdraw enough dividends out which when grossed up and with any other income and reliefs the client may have will utilise his basic rate band both this year and after 6 April this year.

I suspect this will not be enough so yes you could take the rest out as a directors loan account at the latest possible date including it on the P11D and paying S419 tax. In future years dividends could be credited to the directors loan account to clear it.

Another thought is: who are the other shareholders? Wife? Is there potential to utilise her basic rate band, transferring some shares to her before dividends are paid.

 

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By Steve Knowles
28th Mar 2012 15:45

As an additional thought, does he have a salary if not pay the minimum before paying NIC but to get NIC credit. That way he will get his NIC credit, this assumes the he doesn't have any income to utilise his personal allowance.

Dividends will of course therefore be less.

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7om
By Tom 7000
02nd Apr 2012 12:10

Its not the money available

How much retained profits does the co have, thats what drives dividends not cash. Whats his personal income and do you propose loading his tax return up to the £150k a year point so hes not into top rate tax? So some in  2011/12 and some in 2012/13.

 

Seems like a straightforward point to me...

 

Oh yes and is his spouse a shareohlder and should she get some?

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By cfield
02nd Apr 2012 12:38

Need more information

Hi Clara

I had a very similar situation with one of my clients a few years ago. In his case it was a commercial property which he wanted to keep in his own name and let to his company.

You don't mention whether the property is for trading, letting or for his own private residence. The advice could change depending on which it is and whether there will be any VAT on the purchase (ie if the property is opted-in).

In general a company loan is better otherwise there would be a huge tax bill on the dividend. However, it would be best to pay 4% interest to the company to avoid a BIK. There will also be a 25% section 455 tax charge (recoverable when the loan is repaid).

Over the years the 4% interest (or whatever the latest rate happens to be) will really mount up, so this is not a long-term solution. If your client cannot repay the loan through dividends over the next 5-10 years, then maybe best to bite the bullet and go for a dividend.

If your client does not want a loan, then the best bet is to take enough dividend to use up the 40% band in 2011/12 (remember to gross-up) and the balance in 2012/13.

Some might think it best to only go up to £100k this year to avoid losing his personal allowance. However, he would lose even more by deferring dividends to next year as an extra £50k would be taxed at 50% instead of 40%.

A good half-way house might be to take a loan for now and then wait for the top rate of tax to fall to 45% in 2013/14.

It's usually good tax advice to gift shares to your wife but I always ask my clients to beware of a "Thelma and Louise" scenario. Another good piece of advice on this subject was given by Tim Robbins in The Shawshank Redemption, but only if you are not at risk of being thrown off the roof by your client!

By the way, it's not every day you get invited to join a nudist colony. I think you mean "bear " with me :-)

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By jp.chandu
18th Jul 2012 23:47

Labelling Dividends

I hope this is right place to ask for a clarification regarding Dividend transaction labelling.

I am an IT consultant working through my own Limited company and taking accounting services from a firm. My accountant generated a payment advise for a Dividend, but lack of understanding and advise by one of my friend I have transfered this with labelling 'Loan' to my personal account. However, this amount is reflecting on Dividend voucher and also paid VAT to the HMRC. Please advise me whether this amount would be treated as Dividend or Loan.

Thanks & Regards,

Jayaprakash

 

 

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