Retiring: what happens to the business dosh?
Discussion
I run a small company. I am some way off retiring yet but wondered what happens to the cash the business has built up?
My cunning plan was to run down the business for a few years before I go, making a loss by working very little but taking a full wage and perhaps asking Mr Brown to send back some of the coporation tax he has had off us.
But I hear that you can take a sum out of the business on retirement and offset losses against CT for several years. Do they tax that? (silly question)
Anybody know if this is right?
My cunning plan was to run down the business for a few years before I go, making a loss by working very little but taking a full wage and perhaps asking Mr Brown to send back some of the coporation tax he has had off us.
But I hear that you can take a sum out of the business on retirement and offset losses against CT for several years. Do they tax that? (silly question)
Anybody know if this is right?
srebbe64 said:
I'd sell the company and get the buyer to "buy the cash" Pound for Pound. You should be able to get Tax relief of 75%, thereby you'd only pay 10% Tax - not just on the cash but on all of the company's assets.
Problem is making the business saleable. I know *you* have done a superb job of this, Steve, by installing managers of quality you trust and adopting the ideal of the "lazy" Director. Your business, however, is of such a size that you are able to make yourself redundant - and thereby be in a position to sell to a third party.
leftie's business may rely on him utterly and could be too small to effectively plan on making himself redundant. This would therefore require a different strategy.
Sure its nice to sell up - but realistically this may not always be possible.
Artificially creating trading losses by charging higher salaries may be counter productive. For a start, normal trading losses, on a year on year basis can only be:
carried back to the previous accounting year
offset against other company income in the same accounting year the trading loss is incurred (e.g. interest received on bank accounts)
carried forward to the following accounting year
On ceasing to trade, the trading loss in the final year can be carried back up to three years.
Creating a loss through paying directors could also be seen as an illegal transaction, depending on the circumstances of the company. Treating directors as preferential creditors is illegal and, if excessive payments to directors/shareholders put the company into an insolvent position, that is also illegal and will raise an additional Corporation Tax charge under Section 419. This applies to excesive dividends or directors' loan accounts too.
Also, additional salaries generate additional PAYE liabilities and additional employee's and employer's National Insurance liabilities, which would almost definitely be greater than any Corporation Tax saved or recovered.
If you wait until you raech 65, you could give yourself an extra salary without incurring NI liabilities and also avail youself of the higher personal allowances you receive on reaching 65 - thereby having less PAYE to pay. In those circumstances, additional salary amounts might be more beneficial to you and the company.
If you can sell the business, then you personally might be liable to Capital Gains Tax on the proceeds of the disposal. However, sale of businesses or business assets usually attract more favourable treatment under CGT rules.
carried back to the previous accounting year
offset against other company income in the same accounting year the trading loss is incurred (e.g. interest received on bank accounts)
carried forward to the following accounting year
On ceasing to trade, the trading loss in the final year can be carried back up to three years.
Creating a loss through paying directors could also be seen as an illegal transaction, depending on the circumstances of the company. Treating directors as preferential creditors is illegal and, if excessive payments to directors/shareholders put the company into an insolvent position, that is also illegal and will raise an additional Corporation Tax charge under Section 419. This applies to excesive dividends or directors' loan accounts too.
Also, additional salaries generate additional PAYE liabilities and additional employee's and employer's National Insurance liabilities, which would almost definitely be greater than any Corporation Tax saved or recovered.
If you wait until you raech 65, you could give yourself an extra salary without incurring NI liabilities and also avail youself of the higher personal allowances you receive on reaching 65 - thereby having less PAYE to pay. In those circumstances, additional salary amounts might be more beneficial to you and the company.
If you can sell the business, then you personally might be liable to Capital Gains Tax on the proceeds of the disposal. However, sale of businesses or business assets usually attract more favourable treatment under CGT rules.
I will not be able to sell the business. It depends on my skills alone and my wife who does all my admin. I can probably sell one or more contracts, as long as I keep working to oversee the work as I think the clients wouldn't be impressed (bit like an engineer selling his contract to the machine operator: fine until it starts to go wrong).
Any ideas how to get the money out?
Any ideas how to get the money out?
leftie said:
I will not be able to sell the business. It depends on my skills alone and my wife who does all my admin. I can probably sell one or more contracts, as long as I keep working to oversee the work as I think the clients wouldn't be impressed (bit like an engineer selling his contract to the machine operator: fine until it starts to go wrong).
Any ideas how to get the money out?
You've been running it at a profit? Why would you do that! Retaining cash in the business just delays when you are going to pay tax on it. So. Basically you should look for anything more tax efficient than PAYE or Dividend.
I wonder if you could treat the business as a pension asset?
Yes limited co. We take out £30,000 each in share dividend each year and pay ourselves £5000 PA in wages. We probably have another £30,000 tied up in cars and equipment. I have looked everyway to take the allowances and businesses expenses whilst staying reasonable with the IR. I am even down to spending the £150 a year per head in staff entertaining and can't find anything else to offset. We have even invested in future speculative product development to reduce profits and produce a royalty after returement. The residue of profit keeps bulding up and I really want it in my account not the business account.
Taking a higher wage would reduce the company profits and reduce its CT liability - but you would obviously pay a lot more PAYE and NI on the additional salaries.
You could pay yourselves higher divs I suppose PROVIDING you don't allow the company to become insolvent by drawing out too much cash. If you or your partner personally hit the higher tax band, the top slice of the dividend is still only taxed at 32.5% rather than 40% - and there is still no NI to pay. Obviously, dividends don't reduce profits for CT purposes. In fact, there is now a 19% CT charge on dividends. However, if the overall taxable profits of the company are £70,000 or over for the year, the company pays the same total CT whether the shareholders draw dividends or not.
Have you discussed all these matter with your accountant yet?
You could pay yourselves higher divs I suppose PROVIDING you don't allow the company to become insolvent by drawing out too much cash. If you or your partner personally hit the higher tax band, the top slice of the dividend is still only taxed at 32.5% rather than 40% - and there is still no NI to pay. Obviously, dividends don't reduce profits for CT purposes. In fact, there is now a 19% CT charge on dividends. However, if the overall taxable profits of the company are £70,000 or over for the year, the company pays the same total CT whether the shareholders draw dividends or not.
Have you discussed all these matter with your accountant yet?
I'm sure there are myriad restrictions on such a payment or series of payments. For a start, the usual "preferrential traetment" of directors would be frowned upon by the authorities. There are also lots of restrictions on what happens to the money once it gets into the pension scheme. It might be equally inaccessable (at least until actual retirement).
Specialist advice on this would be must - and I mean a pension specialist rather than just a chat with your accountant.
Specialist advice on this would be must - and I mean a pension specialist rather than just a chat with your accountant.
leftie said:Are you really that indispensable? Will the clients be impressed if you retire without handing over the contracts to someone else?
I will not be able to sell the business. It depends on my skills alone and my wife who does all my admin. I can probably sell one or more contracts, as long as I keep working to oversee the work as I think the clients wouldn't be impressed (bit like an engineer selling his contract to the machine operator: fine until it starts to go wrong).
Any ideas how to get the money out?
On the money side, I'd second the suggestion of looking at pension contributions.
victormeldrew said:
I will not be able to sell the business. It depends on my skills alone and my wife who does all my admin. I can probably sell one or more contracts, as long as I keep working to oversee the work as I think the clients wouldn't be impressed (bit like an engineer selling his contract to the machine operator: fine until it starts to go wrong).
Any ideas how to get the money out?
On the money side, I'd second the suggestion of looking at pension contributions.
I have a very niche market that would be difficult to hand over. The big fish in the market wouldn't want to touch it as the market is not geared up for them in turns of turnover/profit. The smaller fish would struggle to acquire or keep the skills. That is why we have done quite well from it. I think a mix of the pensions, extra dividends and perhaps nicer cars might help!
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