Withdrawing Funds from closing Company

Withdrawing Funds from closing Company

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A Company, which hasn't traded for a number of years, but owns land, may well sell the land for approx £225,000. The current balance sheet values the Company at approx £200,000 (no other assets of note). The Company is then likely to wind up, leaving 2 equal directors to withdraw the funds. One is retired, and gets a small pension.

Is the potential £25,000 profit liable for Corp Tax (would it be Capital Gains Tax)?

What is the best way for the retired Director - currently receiving about £15,000/year from pensions, to withdraw his share (just over £100,000)?

Thanks

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By Peter Kilvington
29th Jul 2013 14:55

Directors or shareholders or both.

The sale of the land would be a capital gain made by the company reported on the CT return.  The profit would be the sales proceeds, less costs, less the cost of the land.  You say the company has a balance sheet value of £200,000 but you do not say how this is made up.  If it is the cost of the land then very roughly you have a £25K profit.  However if this is not the case then the cost of the land will be different. 

The only real way for directors to take the money would be via salary.  If however they are also shareholders then, depending upon the amount available for distribution you could be looking at salary, dividends or winding the company up or a combination of all three.

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Replying to amynameisalice:
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By mtscrap
29th Jul 2013 15:01

Thanks Peter.

The value of the land makes up 99% of the balance sheet, so I assume £25,000 will be profit.

 

The two Directors, are also the only, and equal shareholders. I wasnt sure of the best way for them to receive the remaining funds.

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By julian.sims
29th Jul 2013 15:13

CT and CGT or IT

The profit/gain in the company would be subject to Corporation Tax, but assuming the the land is NOT held as trading stock, it will presumably be a Capital Gain and as companies still get Indexation Allowance, there may well be no taxable gain.

As regards withdrawing the funds from the company, without knowing the original purchase/subscription price for the shares, you cannot be certain about the most tax efficient method.  You need to remember that it may be complicated to obtain different treatment for each of the shareholders.

Assuming minimal base cost for the shares and £100,000 received each after final costs of company, it seems there are two treatments :

- dividend - grossed up to £111,111

about £17k will be within basic rate band and remainder (£94) subject to higher rate tax of about £21k, but in addition there may be loss of age allowance and as income taxed over £100,000 there may be loss of personal allowance to consider.  These may be managed by payment of dividends over more than one year (but bear in mind ongoing professional costs)

- formal liquidation - (reserves more than £25,000, therefore outside statutory successor to ESC C16)

say £10k will be covered by Annual Exemption, next £17k will be taxed at 18% and remainder (£73k) at 28%, giving a tax bill of about £23.5k and in addition having to fund liquidators fees.  From the facts, I cannot see that Entrepreneurs Relief will be available.

It does look as though it will depend on loss of PA (cost about £2k) and any age allowance will make it very marginal so you need to work all the figures through very carefully.  Suggest you are sure to check whether anything else may distort the figures in year of distribution, such as new pensions, insurance bonds, annual bond interest.

 

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By Maslins
29th Jul 2013 15:15

Limited options

I think you've got two completely separate steps:

1) company sells the land, on which it may suffer corporation tax (subject to initial cost/indexation allowance etc).

2) director/shareholders look to extract cash.

Given the company hasn't traded for a while, and just has some land, any CGT type disposal would be unlikely to qualify for entrepreneurs relief, making it much less appealing.

If both the shareholders other income is circa ~£15k, then they could take ~£20k dividends each before hitting higher rates (ie tax free).  I might be inclined to take the rest either immediately, or perhaps spread over a second year so whilst some would suffer an effective 25% tax, at least they wouldn't lose their personal allowance or hit the additional rate band.

Are they still in a position where they can add funds to their pension?  If so, could perhaps do that to the extent it wipes out any corporation tax on the land disposal first.

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By cliveth
31st Jul 2013 11:19

Also consider IHT

There isn't sufficient information provided but obviously the company funds would form part of the estate for IHT so may need to consider this when adopting a long term extraction plan.

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By tomriv801
31st Jul 2013 13:14

in very simiar situation myself.

comforting to know there is someone else in a similar situation as myself.

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By jiatbanus
31st Jul 2013 15:27

As each shareholder's circumstances might be different, and the company is simple and active, a Members Liquidation would cost little and it could solve the distribution and winding up all at one go.  

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By User deleted
31st Jul 2013 16:15

What's on the other side of the balance sheet?

You say that the property makes up about 99% of the balance sheet. Where is the corresponding credit?

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By markabacus
01st Aug 2013 13:21

Are they married?

If they are married depending on spouse's tax position they could tfr some of the shareholding and then issue dividends across 4 instead of 2, couldn't they?

 

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