The Budget dividend problem

The Budget dividend problem

Didn't find your answer?

Client has suggested this to me

1. This year declare the biggest dividend possible to keep him in the 20% bracket. Not actually pay it out but credit directors loan a/c

2. Next tax year  take a loan @ commercial rates ( 3.5% ? ) on an agreement that he pays it back with the interest at some future indeterminate date.

3. Repeat 2. as required

Let the future take care of itself until; George or another chancellor changes the rules again.

This is the least silly suggestion clients have put forward since the budget

Anyone got alternative suggestions or reasons why this won't work apart from insolvency problems

Replies (72)

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By Matrix
13th Jul 2015 15:03

Well there will be s455 implications if you keep repeating 2.

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Replying to Red Leader:
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By qhas
13th Sep 2015 12:27

S455

Matrix wrote:

Well there will be s455 implications if you keep repeating 2.


If the loan is granted at Commercial Rate of interest would there still be a S455 liability? How would it be calculated?
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Portia profile image
By Portia Nina Levin
13th Jul 2015 15:44

Yes but

S. 455 is only 25%, unless they are going to change that too. So once you have used up the BRB by dividends a loan that will never actually be repaid might be attractive.

Still we should not mention that, in case it has not been spotted.

 

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By User deleted
13th Jul 2015 15:39

I think it is likely to be a combination of:

- a leveraged capital structure whereby £1 capital to be mixed with some loans. 

- loans to directors without being hit by the bed & breakfast rules

- claiming pension and other reliefs

- greater appetite for all available tax products like SEIS etc

Depending on the fine print, tax advisers may expect to have a busy period ahead!

 

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By bernard michael
13th Jul 2015 15:57

TG or perhaps TG

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By Dave Paveley
13th Jul 2015 17:07

Don't fancy that solution...

How about changing from dividends as the preferred method of profit extraction to rent?

OMB directors rent their spare room to the company at, say, £30k per annum. Company saves £6k corporation tax, individual pays £6 income tax. No NIC.

Everyone's a winner.

No?

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Portia profile image
By Portia Nina Levin
13th Jul 2015 17:10

No Dave

If you charge more than a market rent, it will fail the wholly and exclusively test and the excess will just get treated as a dividend anyway.

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By Dave Paveley
13th Jul 2015 17:34

Yes Portia

You know what my next question is going to be...

 

How much is a market rent?

 

(Marginal gains: A bit of rent here, some loan interest there...  all chipping away at the dividend)

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Replying to FirstTab:
Stepurhan
By stepurhan
13th Jul 2015 17:41

Nothing new

Dave Paveley wrote:
How much is a market rent?
For a spare room, not £30k unless it is in a seriously expensive area.

So why did you suggest £30k in the first place? Reasonable rent to companies (offset by the expenses of providing that space) has been around for years. The only new thing you appeared to be suggesting was an insupportable rent figure. If you're now backing down on even that then this is old news.

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Portia profile image
By Portia Nina Levin
13th Jul 2015 17:35

You mean
People will have to do some proper tax planning? In the round? Surely not?

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Replying to tom123:
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By carlh
14th Jul 2015 09:24

maybe a

Portia Nina Levin wrote:
People will have to do some proper tax planning? In the round? Surely not?

RT Maybe ???  :)

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By hughjoyce
13th Jul 2015 17:44

What about adding another shareholder?

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Hand
By Digit Dabbler
13th Jul 2015 23:28

Close company loans to participators

Too late Portia - they're already in the government's sights.  They consulted on them in 2013, coming up with four options, which ranged from keeping the current system to some pretty draconian suggestions.  They chose to do nothing then, but to continue the consultation with a view to making smaller adjustments.  So far nothing!  Where are they?  Growing into a monster in some dark corner, waiting for a lucrative moment to spring out? Cynical?  What me?  

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

 

Shame the rent-a-room scheme isn't available for business rental.

 

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By thomas34
14th Jul 2015 07:50

Point One

is essential subject to sufficient retained profits. So my clients will be advised to take dividends in preference to reimbursing any expenses leaving such amounts on their loan account. Where there are sufficient retained profits in 2015/2016 it would be criminal not to use up standard rate bands. I can see a lot of spouses becoming director/shareholders in the next few months although HMRC may try to resurrect the settlements legislation again.

 

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Replying to lionofludesch:
By Howard Marks
14th Jul 2015 09:33

Huh???

thomas34 wrote:

So my clients will be advised to take dividends in preference to reimbursing any expenses leaving such amounts on their loan account.

 

Come again??

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blue sheep
By NH
14th Jul 2015 08:26

a combination

Advice has to be - 

1. Max dividends in BRB up to 5th April 2016, if they require cash left in company it can be loaned back

2. Review involvement of spouse with a view to him/her having at least 5k of divis if earning in BRB.

3. start charging market rent for use of office

potential husband/wife company - 10k salary each, 5k divi each, 5k rent, 35k household income with no 7.5% surcharge.

 

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By exorsi
14th Jul 2015 08:37

Rent issues
Will there be any CGT issues on renting the room to the company at a later date?

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Replying to Matrix:
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By mail.taxperfect.co.uk
14th Jul 2015 09:14

Only if...

exorsi wrote:
Will there be any CGT issues on renting the room to the company at a later date?

Only if the room is used exclusively for non-private use.

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Jennifer Adams
By Jennifer Adams
14th Jul 2015 08:50

Reminder - settlement provisions.

There is an exemption for outright gifts to spouses under s626,Chapter 5 of Part 5 of ITTOIA 2005 but the exemption only applies if both of the following conditions are present:

The gift carries the right to the whole of the income arising andThe property is not wholly or substantially a right to income

Despite this exemption any gratuitous transfer or issue of shares to a spouse is likely to be treated as a ‘settlement’ even though there is no formal agreement or trust document.

You're looking at Arctic Systems and Patmore.

 

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By hughjoyce
14th Jul 2015 09:28

Rent?

Apologies in advance but if the individuals rent a room to the company, unless they can show they have incurred matching costs to provide the rental, wont they be taxed as individuals on the rental income?

 

 

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By hughjoyce
14th Jul 2015 09:30

Adult children

Very few of our clients have a long term husband/wife that they want to allocate shares to. Think romance is dead on the South Coast.

 

A few suggesting adult children, which I know is a different system.

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Replying to DJKL:
blue sheep
By NH
14th Jul 2015 09:34

kids?

hughjoyce wrote:

Very few of our clients have a long term husband/wife that they want to allocate shares to. Think romance is dead on the South Coast.

 

A few suggesting adult children, which I know is a different system.

Why just adults? I have a farmer client whose kids work evenings and weekends in the summer

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Replying to Tax Dragon:
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By hughjoyce
14th Jul 2015 09:44

??

NH wrote:

hughjoyce wrote:

Very few of our clients have a long term husband/wife that they want to allocate shares to. Think romance is dead on the South Coast.

 

A few suggesting adult children, which I know is a different system.

Why just adults? I have a farmer client whose kids work evenings and weekends in the summer

 

Thought dividend income for under 16s was treated as parents?

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By JamesAnd
14th Jul 2015 09:49

When are you proposing repayment of the loans?

- when there is a friendly tax regime making it feasible or

- is it more likely repayment would occur when company ceases. In which case, would the whole loan not be taxable as a dividend due to presumably, the outstanding loans being written off>

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Portia profile image
By Portia Nina Levin
14th Jul 2015 10:37

@ James

The loan can be distributed on a winding up or liquidation, so that the shareholder ends up owing themself money, which constitutes repayment of the loan (see http://www.hmrc.gov.uk/manuals/ctmanual/CTM36210.htm).

A section 458 repayment can then be claimed, while tax on the distribution is paid at CGT rates, which might still be 10%.

@DigitDabbler I was aware of the closed consultation, which concluded with "do nothing significant". We may now see a rate change. We may not. If we do not, just borrowing the money does look attractive, taken together with other efficient methods of taking profits from the company.

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the sea otter
By memyself-eye
14th Jul 2015 10:38

Interesting thought


Make adult children shareholders then use their (otherwise unused) £5k allowance. Then charge them under the rent a room scheme.

They have to be living with you obviously....  

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By JamesAnd
14th Jul 2015 10:57

@ Portia

I wasn't sure if this would work in this case where there are historic loans/loans taken ever year for a number of years.

 

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Replying to Wilson Philips:
By cfield
20th Jul 2015 10:49

A few points

Rent for home office should be backed up by a license agreement and a board minute authorising the company to pay rent, preferably contemporaneous. This should be for a serviced office so rent can be bumped up to cover electricity, heating, etc.

Section 455 tax on a participator loan can be avoided by clearing the year-end balance by dividend/salary within 9 months. This can be done by book entry so no need to physically repay the cash. It doesn't matter if you take out more cash after the year end - that counts as a new loan. You can even take the salary/dividend in cash - it still counts as a repayment of the year end balance. Just make sure the loan doesn't exceed salary/dividend for the next year.

Watch the BIK rules on the loan. Best to calculate 3.25% interest and pay it to the company by 19 July. That avoids a P11D and 13.8% Class 1A NI.

Don't create non-voting shares or preference shares to pay a spouse dividends. They will fail the gifts exemption.

Make sure you do not have a retained interest in any shares you allot to adult children or other family members (or in the dividends earned on those shares).

 

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Replying to Caber Feidh:
By JimH
05th Aug 2015 13:06

Official interest rate now 3%

cfield wrote:

Watch the BIK rules on the loan. Best to calculate 3.25% interest and pay it to the company by 19 July. That avoids a P11D and 13.8% Class 1A NI.

 

and has been 3% since 6 April 2015.

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Replying to Red Leader:
By cfield
05th Aug 2015 13:50

HMRC Official Rate

JimH wrote:

cfield wrote:

Watch the BIK rules on the loan. Best to calculate 3.25% interest and pay it to the company by 19 July. That avoids a P11D and 13.8% Class 1A NI.

and has been 3% since 6 April 2015.

Yes it has. I should have made in clearer I was referring to 2014/15 when it was 3.25%.

Funny how HMRC are only now dropping their rate when everyone else is talking about rates going up soon. They froze it at 4% for 4 whole years when the base rate was just 0.5%. Still, better late than never I suppose. Perhaps they've only just opened the envelope!

I bet they don't waste any time increasing it when the base rate finally goes up. It reminds you a bit of petrol prices. When the oil price comes tumbling down, the price at the pumps falls as slowly as a nun's knickers, yet when oil goes up, we suddenly see these huge increases.

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By ayjay3
20th Jul 2015 10:58

This all sounds very Greek to me !

Why not just grin and bear it and pay the tax like everyone else?  Or are going to be heading down the Greek economy route ??

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7om
By Tom 7000
20th Jul 2015 11:28

If you make the loan

Yep interest is at the official rate but its per year.... so you pay the 25% S455 and then every year add another 3 or 4 % as interest income to the loan balance that wil eventually need repaying? You are building a future probem.

Any Cr balances on DLAs - you can charge interest on these ...but youll need to do a CT61 and youll need a pretty big loan even at interest rates of 20%+

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By mickeyparish
20th Jul 2015 13:35

Principle of double taxation

Now that the principal of double taxation for the same profit has been firmly established by our cleverly fleecing chancellor, it is more than likely that the 7.5% rate won't last long, and will have a life of its own.  Expect 10% in a budget sometime soon, followed by 12.5%, 15% and so on.

So forget all the strategies for minimising, sell up and take any money out at 10% ER CGT before it's too late for that too.

Overseas buyers, who won't have to pay the double tax, will now be more interested in buying UK company shares than their UK owners will be in retaining them.

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RLI
By lionofludesch
20th Jul 2015 13:40

Double Taxation

We've had double taxation for many years.

Tax and NIC on your earnings, for example. Since 1958.

Or duty and VAT on your beer. Since 1973.

Let's keep our complaints real.

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By almost_a_geek
20th Jul 2015 13:51

Am I missing something?

All of these responses are following on from an opening post referring to basic rate dividends and the problem caused by the budget, no mention has been made regarding higher rate so I am therefore wondering why loans are being discussed as a remedy to the new regime....

I may have misunderstood the budget entirely [quite possible!] but with the scrapping of the tax credit, doesn't this give approximately £3k of additional take-home dividend from the previous regime still within the basic rate?

If so, assuming a c.£10k salary, a tax charge of approximately £2k arises, after using the £5k dividend allowance.

Is this not actually £1k better off in real cash terms, so basic rate tax payers are slightly better off anyway? Or have I missed the point?

 

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Replying to Calculatorboy:
Portia profile image
By Portia Nina Levin
20th Jul 2015 13:53

Probably

almost_a_geek wrote:

Or have I missed the point?

It is very easy to miss points when you have your head up your [***].

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Replying to Calculatorboy:
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By andy.partridge
20th Jul 2015 14:01

I wonder if . .

almost_a_geek wrote:

Is this not actually £1k better off in real cash terms, so basic rate tax payers are slightly better off anyway? Or have I missed the point?

 

I wonder if you are over-thinking this. Sometimes it is the simple answer that is the correct one.
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Dave Chaplin
By Dave Chaplin
20th Jul 2015 14:28

Take dividends now

If the limited company has no value, commonly called a PSC, then chances are the director/employee will be on a low circa £8K salary and taking the rest in dividends. As our dividend impact calculator shows there is som ebizarre behaviour for those who are currently towards the end of the basic rate band. They end up getting rather stuffed, more so than anyone who is just into the HRT band. So, how to get around it? If you can somehow survive on other income for a few years then run the cash up, disolve via MVL and pay 10%. Take a break and then start again with a new company. If your company is a business and has value, there's not really much you can do, unless you plan to sell it in a few years and can survive on savings in the meantime, also making use of 10% ER rates. What is true, when you crunch the numbers, is that if you have a large cash surplus and were planning on taking it out at some point for a reason (house project etc) then it is better to do it before the new tax year starts. The savings are considerable, especially if you are splitting dividends - because you get hit twice.

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Replying to CardiffAccountant:
Dave Chaplin
By Dave Chaplin
11th Aug 2015 20:10

Nope
I am obviously referring to those paying higher rate tax payers.

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By mickeyparish
20th Jul 2015 15:10

Double Taxation

Lionofludesch wrote:

 

We've had double taxation for many years.

Tax and NIC on your earnings, for example. Since 1958.

Or duty and VAT on your beer. Since 1973.

Let's keep our complaints real.

 

Good point.  We have to consider it an extra tax.

Which makes the chancellor's boast of "lowest corporation tax rate in the developed world" a bit of a hollow claim.

Even when the headline rate reaches 18%, the real rate will be 25.5% minimum.

I will repeat, UK shareholders should now buy foreign company shares, and foreign shareholders should buy UK company shares.

In fact I wonder if it is even legal under EU rules to charge UK shareholders in a UK Company more tax on profits than a foreign shareholder ?

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Replying to cathygrimmer:
RLI
By lionofludesch
21st Jul 2015 11:45

Beer and Women

mickeyparish wrote:

Which makes the chancellor's boast of "lowest corporation tax rate in the developed world" a bit of a hollow claim.

Bit insulting to the Irish, I would've thought.

You can't say the real rate is 25½%.  If you leave the money in the company, it's 18%.  The idea is to encourage companies to invest in themselves and not to give it to shareholder-directors to blow on beer and women*.

 

*Or whatever.

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Replying to Wilson Philips:
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By hughjoyce
21st Jul 2015 12:40

too true

NH wrote:

lionofludesch wrote:

[The idea is to encourage companies to invest in themselves and not to give it to shareholder-directors to blow on beer and women*.

*Or whatever.

Nah, the idea is to get more tax money out of OMB small companies, what would be the point of encouraging them to leave the money in the company?

 

How are we supposed to leave all money in the company NH? Not sure about others but the only reason I work in this company is to pay bills! If I could afford to not take any money out of it I would certainly not be sat here for 12 hours a day having to deal with the likes of HMRC!

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Replying to paul.benny:
RLI
By lionofludesch
21st Jul 2015 13:25

What ?

hughjoyce wrote:

How are we supposed to leave all money in the company NH? Not sure about others but the only reason I work in this company is to pay bills! If I could afford to not take any money out of it I would certainly not be sat here for 12 hours a day having to deal with the likes of HMRC!

1.  Do you manage to get it all out ?  Or does lack of cash stop you ?

2. Why should George give you a tax break for that ?  Why shouldn't you just pay the same as any other employee ?

3. If the object is to screw OMCs for as much as possible, why is this mythical 25½% rate less than the self employed are paying ?

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Portia profile image
By Portia Nina Levin
20th Jul 2015 15:20

Oh look
A picnic without any sandwiches.

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blue sheep
By NH
20th Jul 2015 15:38

@mickeyparish

leaving small companies aside, how many people do you know of that earn more than 5k in dividends?

In 15 years I have dealt with around 800 clients, only ever had 2 - and one of those earns about 6k.

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By hughjoyce
21st Jul 2015 13:42

Matter of opinion

Its a matter of opinion, but mine is that the self employed and company owners should not pay the same tax as an employee. Having been both, there is no comparison to the uncertainty and stress involved. Whether you don't feel that business owners should have a slight tax break over the employed is personal preference. There are plenty of other groups of people I would like to see get less tax breaks but I guess that's human nature, we all support different causes.

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RLI
By lionofludesch
21st Jul 2015 13:47

Differential

And you say that differential should be as much as the difference between 32% and 18%  ?

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blue sheep
By NH
21st Jul 2015 13:57

@hughjoyce

couldnt agree more hughjoyce, I have also been the 9-5 secure, no risk or investment employee, as well as the self employed person who risks everything, has many sleepless nights and doesnt know where the next penny is coming from at times and has to work 7 day weeks.

There is no comparison, peoples always say to me, it must be great being your own boss, my reply has always been, "yes I love it, but being the boss just means being paid last".

Small businesses are the lifeblood of the community, bring in more than just income tax - think VAT, employers NI, business rates. They support whole families by employing people.

Yes I would prefer to be self employed, it is a choice, but this argument that why should we pay less tax sickens me, and is usually only put forward by those who have never been self employed and are jealous.

 

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RLI
By lionofludesch
21st Jul 2015 14:50

Really ?

I'm self employed.  Have been for 23 years.

I'm also not looking for a free tax ride.

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Replying to Ruddles:
blue sheep
By NH
21st Jul 2015 15:05

who said free?

lionofludesch wrote:

I'm self employed.  Have been for 23 years.

I'm also not looking for a free tax ride.

you must be the exception to the rule....

No one is suggesting a free tax ride, but I think everyone has been shocked at the way the Tory government have attacked small business, and I for one feel it is very short sighted, but I suppose the powers that be would love nothing more than to eliminate small businesses and just have huge corporations with no dealings in cash, lots of lovely employers NI and pension contributions, no tricky small tax enquiries or IR35, oh and dont forget the non exec board positions for ex politicians....

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