Closing Company advise.
Discussion
Hi All,
My first post so please be gentle :-)
I was freelance for a while with my own Ltd company.
I have since gone to the dark side and become a full time employee of another company (as the package was good, but I am paying the 40% tax now which is not so good).
My problem is that I built up a bit of money in the Ltd company account (approx 70k) and want to be able to get it out without having to give the tax vampire 40% of it and also close the company as I will not be using it anymore.
My better half works part time but I imagine paying her in divdends would take a few years before we could get all the money out?
Not talking about avoiding paying just want a more efficient way of dealing with this problem :-)
Have mortage, married/kids, I am working full time paye at 40% with usual company benefits.
Thanks for taking the time to read this. Hopefully will get some constructive advise :-)
My first post so please be gentle :-)
I was freelance for a while with my own Ltd company.
I have since gone to the dark side and become a full time employee of another company (as the package was good, but I am paying the 40% tax now which is not so good).
My problem is that I built up a bit of money in the Ltd company account (approx 70k) and want to be able to get it out without having to give the tax vampire 40% of it and also close the company as I will not be using it anymore.
My better half works part time but I imagine paying her in divdends would take a few years before we could get all the money out?
Not talking about avoiding paying just want a more efficient way of dealing with this problem :-)
Have mortage, married/kids, I am working full time paye at 40% with usual company benefits.
Thanks for taking the time to read this. Hopefully will get some constructive advise :-)
Based on what you are saying, I assume your wife is a shareholder. On the assumption that she is, she is entitled to a dividend if you are paying one out of the company.
Of course, if one shareholder is getting a dividend, so should the other. The amount of dividend each gets will be based on the number of dividends each shareholder owns.
It is possible for one shareholder to waive their entitlement to their dividend - although HMRC may question the logic behind such a waiver. However, it is a tactic sometimes used in that the higher rate taxpayer waves their dividend and the dividend goes to the lower rate taxpayer.
Some of the money could be got out that way.
The remainder could be removed following the winding up of the company as a Capital Distribution - which is subject to Capital Gains Tax rather than Income Tax. Furthermore, the CGT on such an extraction is at the Entrepeneurial Relief Rate rather than full CGT rate.
There is a catch though. If the capital being extracted is £25,000 or less, then the closing of the company can be done by a simple "Striking Off" request. If over £25,000, then a full blown liquidation will be required, which will cost as a formal liquidator has to be appointed to handle the liquidation.
Of course, if one shareholder is getting a dividend, so should the other. The amount of dividend each gets will be based on the number of dividends each shareholder owns.
It is possible for one shareholder to waive their entitlement to their dividend - although HMRC may question the logic behind such a waiver. However, it is a tactic sometimes used in that the higher rate taxpayer waves their dividend and the dividend goes to the lower rate taxpayer.
Some of the money could be got out that way.
The remainder could be removed following the winding up of the company as a Capital Distribution - which is subject to Capital Gains Tax rather than Income Tax. Furthermore, the CGT on such an extraction is at the Entrepeneurial Relief Rate rather than full CGT rate.
There is a catch though. If the capital being extracted is £25,000 or less, then the closing of the company can be done by a simple "Striking Off" request. If over £25,000, then a full blown liquidation will be required, which will cost as a formal liquidator has to be appointed to handle the liquidation.
Hi Eric,
You seem to know your onions on this and mention something I've heard before, about being able to extract monies from closing a company and offsetting it against CGT.
So... why shouldn't I close my company every year and start a new one?
Let's say my turnover is 100K 'ish. I take a fair chunk of that every year as dividend to pay living expenses but have say £20K left in the company. So I close the company and take the £20K surplus for me and offset it against my CGT allowance (I have nothing else that would count as being liable for CGT).
Starting a new company is a few hundred pounds. Doing the above could save 40% of whatever sum I take out.
Or am I thinking b
ks? 
It's something that's crossed my mind a few times but I've always assumed there must be a reason not to.
You seem to know your onions on this and mention something I've heard before, about being able to extract monies from closing a company and offsetting it against CGT.
So... why shouldn't I close my company every year and start a new one?
Let's say my turnover is 100K 'ish. I take a fair chunk of that every year as dividend to pay living expenses but have say £20K left in the company. So I close the company and take the £20K surplus for me and offset it against my CGT allowance (I have nothing else that would count as being liable for CGT).
Starting a new company is a few hundred pounds. Doing the above could save 40% of whatever sum I take out.
Or am I thinking b
ks? It's something that's crossed my mind a few times but I've always assumed there must be a reason not to.Eric Mc said:
Based on what you are saying, I assume your wife is a shareholder. On the assumption that she is, she is entitled to a dividend if you are paying one out of the company.
Of course, if one shareholder is getting a dividend, so should the other. The amount of dividend each gets will be based on the number of dividends each shareholder owns.
It is possible for one shareholder to waive their entitlement to their dividend - although HMRC may question the logic behind such a waiver. However, it is a tactic sometimes used in that the higher rate taxpayer waves their dividend and the dividend goes to the lower rate taxpayer.
Some of the money could be got out that way.
The remainder could be removed following the winding up of the company as a Capital Distribution - which is subject to Capital Gains Tax rather than Income Tax. Furthermore, the CGT on such an extraction is at the Entrepeneurial Relief Rate rather than full CGT rate.
There is a catch though. If the capital being extracted is £25,000 or less, then the closing of the company can be done by a simple "Striking Off" request. If over £25,000, then a full blown liquidation will be required, which will cost as a formal liquidator has to be appointed to handle the liquidation.
I am in a similar situation with accrued capital invested....I was told I would be unlikely to be allowed entrepreneurial relief. However, not sure how HMRC regards this - are there any "rules"?Of course, if one shareholder is getting a dividend, so should the other. The amount of dividend each gets will be based on the number of dividends each shareholder owns.
It is possible for one shareholder to waive their entitlement to their dividend - although HMRC may question the logic behind such a waiver. However, it is a tactic sometimes used in that the higher rate taxpayer waves their dividend and the dividend goes to the lower rate taxpayer.
Some of the money could be got out that way.
The remainder could be removed following the winding up of the company as a Capital Distribution - which is subject to Capital Gains Tax rather than Income Tax. Furthermore, the CGT on such an extraction is at the Entrepeneurial Relief Rate rather than full CGT rate.
There is a catch though. If the capital being extracted is £25,000 or less, then the closing of the company can be done by a simple "Striking Off" request. If over £25,000, then a full blown liquidation will be required, which will cost as a formal liquidator has to be appointed to handle the liquidation.
Piersman2 said:
Hi Eric,
So... why shouldn't I close my company every year and start a new one?
There are costs involved in closing a company. Since 2012, Entrepeneurial Relief is only available above "£25,000 if the company is formally liquidated.So... why shouldn't I close my company every year and start a new one?
This will cost at least £2,000 in liquidator's fees I would guess.
Before 2012, the closing of the company could be done by a simple "no cost" Striking Off process - and I know of one tax lecturer who was advocating more or less what you are suggesting, i.e. serial striking off on a regular basis.
The loophole was closed (kind of) with the upper limit of £25,000 for simple "Striking Offs".
See below for a detailed summary of how the rules changed in 2012 -
The demise of ESC C16 and the Members’ Voluntary Liquidation
Extra Statutory Concession C16 (ESC C16) was introduced in 1985 to deal with the tax position for shareholders where a company was being struck off, with the company’s assets, often cash, being returned to the shareholders.
The concession applied Capital Gains Tax (CGT) treatment to the distribution of assets as though a formal liquidation had been undertaken, rather than assets being treated as subject to income tax which would have been the position without the concession. ESC C16 therefore entitled an individual shareholder to obtain a tax treatment which was generally more favourable, with fairly minimal conditions being relevant for the concession to be applied. This was particularly attractive to shareholders of solvent companies after sale or cessation of a trade, as the process to wind up the company could be dealt with relatively quickly and cost efficiently, whilst potentially allowing them access to CGT Entrepreneurs’ Relief with a tax rate of just 10%.
ESC C16 was replaced by legislation effective from 1st March 2012. However, whereas the concession did not limit the value of distributions upon which shareholders could seek CGT treatment, the legislation has effectively imposed a maximum cap of just £25,000.
If the total reserves available for distribution breach this amount, it means that the shareholders will suffer income tax rather than CGT on the entire assets distributed as part of the winding up of the company. It is worth noting that the limit applies only to reserves and not share capital distributed.
Where a shareholder is planning to wind up a company, it is important that advice is sought in this area. For example, HMRC have stated that they will review any dividends that are paid in the last year of operation, and to the extent that they have reduced the final distribution to below the £25,000 limit, the balance may not qualify as a capital distribution!
Eric Mc said:
Beggarall said:
I am in a similar situation with accrued capital invested....I was told I would be unlikely to be allowed entrepreneurial relief. However, not sure how HMRC regards this - are there any "rules"?
YesTalk to your accountant.
Eric Mc said:
There are costs involved in closing a company. Since 2012, Entrepeneurial Relief is only available above "£25,000 if the company is formally liquidated.
This will cost at least £2,000 in liquidator's fees I would guess.
Before 2012, the closing of the company could be done by a simple "no cost" Striking Off process - and I know of one tax lecturer who was advocating more or less what you are suggesting, i.e. serial striking off on a regular basis.
The loophole was closed (kind of) with the upper limit of £25,000 for simple "Striking Offs".
See below for a detailed summary of how the rules changed in 2012 -
The demise of ESC C16 and the Members’ Voluntary Liquidation
Extra Statutory Concession C16 (ESC C16) was introduced in 1985 to deal with the tax position for shareholders where a company was being struck off, with the company’s assets, often cash, being returned to the shareholders.
The concession applied Capital Gains Tax (CGT) treatment to the distribution of assets as though a formal liquidation had been undertaken, rather than assets being treated as subject to income tax which would have been the position without the concession. ESC C16 therefore entitled an individual shareholder to obtain a tax treatment which was generally more favourable, with fairly minimal conditions being relevant for the concession to be applied. This was particularly attractive to shareholders of solvent companies after sale or cessation of a trade, as the process to wind up the company could be dealt with relatively quickly and cost efficiently, whilst potentially allowing them access to CGT Entrepreneurs’ Relief with a tax rate of just 10%.
ESC C16 was replaced by legislation effective from 1st March 2012. However, whereas the concession did not limit the value of distributions upon which shareholders could seek CGT treatment, the legislation has effectively imposed a maximum cap of just £25,000.
If the total reserves available for distribution breach this amount, it means that the shareholders will suffer income tax rather than CGT on the entire assets distributed as part of the winding up of the company. It is worth noting that the limit applies only to reserves and not share capital distributed.
Where a shareholder is planning to wind up a company, it is important that advice is sought in this area. For example, HMRC have stated that they will review any dividends that are paid in the last year of operation, and to the extent that they have reduced the final distribution to below the £25,000 limit, the balance may not qualify as a capital distribution!
Ahhh, ok, so the last paragraph would indicate that they would consider dividends paid in the year as counting towards the £25K limit they've imposed? Which would mean having to be properly liquidated not just struck off.This will cost at least £2,000 in liquidator's fees I would guess.
Before 2012, the closing of the company could be done by a simple "no cost" Striking Off process - and I know of one tax lecturer who was advocating more or less what you are suggesting, i.e. serial striking off on a regular basis.
The loophole was closed (kind of) with the upper limit of £25,000 for simple "Striking Offs".
See below for a detailed summary of how the rules changed in 2012 -
The demise of ESC C16 and the Members’ Voluntary Liquidation
Extra Statutory Concession C16 (ESC C16) was introduced in 1985 to deal with the tax position for shareholders where a company was being struck off, with the company’s assets, often cash, being returned to the shareholders.
The concession applied Capital Gains Tax (CGT) treatment to the distribution of assets as though a formal liquidation had been undertaken, rather than assets being treated as subject to income tax which would have been the position without the concession. ESC C16 therefore entitled an individual shareholder to obtain a tax treatment which was generally more favourable, with fairly minimal conditions being relevant for the concession to be applied. This was particularly attractive to shareholders of solvent companies after sale or cessation of a trade, as the process to wind up the company could be dealt with relatively quickly and cost efficiently, whilst potentially allowing them access to CGT Entrepreneurs’ Relief with a tax rate of just 10%.
ESC C16 was replaced by legislation effective from 1st March 2012. However, whereas the concession did not limit the value of distributions upon which shareholders could seek CGT treatment, the legislation has effectively imposed a maximum cap of just £25,000.
If the total reserves available for distribution breach this amount, it means that the shareholders will suffer income tax rather than CGT on the entire assets distributed as part of the winding up of the company. It is worth noting that the limit applies only to reserves and not share capital distributed.
Where a shareholder is planning to wind up a company, it is important that advice is sought in this area. For example, HMRC have stated that they will review any dividends that are paid in the last year of operation, and to the extent that they have reduced the final distribution to below the £25,000 limit, the balance may not qualify as a capital distribution!
So why not have two companies running at any one time, on a rolling basis? let the older do no trade for a year, then strike off with the £25K in the pot to be paid out?
It all just starts to get a bit complicated for a simpleton like me!
Eric Mc said:
What's the difficulty and what's the grey area?
The issue seems to be that I have earned cash and saved it in an investment account in excess of what is needed to run the business. The revenue might thus regard this as an investment company and certainly so now I have ceased to work and generate income. My understanding is that there are test cases on-going and the risk is that entrepreneurial relief is refused and CGT applied at full rate - at a point of no return (having gone through liquidation). Eric Mc said:
Explain.
Investment companies are old school. We have companies that can have investment business now. For SSE and ER etc, it's important for a company to be a trading company (with broadly less than 20% investment activity). There are all sorts of things that appear to swing on whether a company is an "investment company" or not if you listen to people on this forum, like they pay higher tax etc. so I just wanted to point out there is no such thing as an investment company.
I'm sure you know all that though.
Alpinestars said:
For SSE and ER etc, it's important for a company to be a trading company (with broadly less than 20% investment activity).
I think you are being semantic about definitions. If there are differences between the tax treatment of companies with more than or less of their business activity derived from investments, then the distinction, if no longer official, still exists to some extent and is something a person running a business should still be aware of.One area where the difference is definitely less important is regarding the basic Corporation Tax rate as the higher rate of Corporation Tax is gradually being reduced to the level of the Lower Corporation tax rate.
But, as you say above, the differences of treatment for Capital Gains Tax purposes are still in place.
Many thanks all for taking time to read and respond. Lots of useful advise. I wish i could put it all into my pension but would like to make it work for me now (pay some of my mortgage off or buy another property). I may go down the liquidation route as I do not need to keep it open any longer.
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