closing a company tax implications
Discussion
Hi,
Yes I will discuss this with an accountant I would just like a heads up for now thanks!
I have a limited company that I ran as well as my day job. It was registered april 1st last year and the company has made about £17k. The job I had was in higher tax bracket. I have now had rather a nasty change in circumstance and have left my job and have to close the company.
Originally I was going to get the money out as dividend and pay corp tax. Now I'm closing it does this change is there a better way of getting the money out esp as Im not earning now?
Thanks
Yes I will discuss this with an accountant I would just like a heads up for now thanks!
I have a limited company that I ran as well as my day job. It was registered april 1st last year and the company has made about £17k. The job I had was in higher tax bracket. I have now had rather a nasty change in circumstance and have left my job and have to close the company.
Originally I was going to get the money out as dividend and pay corp tax. Now I'm closing it does this change is there a better way of getting the money out esp as Im not earning now?
Thanks
You could try and make yourself redundant from your company. There are some pretty generous tax-free allowances that you could use. I'm not sure if there might be some issues due to the fact that you were only part-time (and of course the fact that the company has not traded for long either...).
Also note that if you're out of work and trying to claim benefits you might not want too much cash in your own name either... so perhaps best to keep it in the business (and you could always loan yourself some money from the company in the meantime).
Also note that if you're out of work and trying to claim benefits you might not want too much cash in your own name either... so perhaps best to keep it in the business (and you could always loan yourself some money from the company in the meantime).
There is a route (under an extra statutory concession) to withdraw the remaining funds out of a company on its cessation as capital distribution (i.e. taxable on you under Capital Gains Tax) rather than income distribution (i.e. as a Dividend, taxable under Income Tax).
However, whilst the CGT route may be more effective for taking out £17k (since you have £9,600 in current tax year to draw upon tax free, with balance likely to be taxable at only 10% under 'entrepreneurs relief' regime), there are a number of conditions that must be met. Your Accountant should also consider your other income in the year to compare what tax you would pay on a dividend (i.e. are you a higher rate taxpayer or not in year of distribution).
As long as these conditions are met and it will stack up to be more tax efficient, you would basically apply to HMRC for clearance for the capital route under the concession and secondly provide HMRC with some formal undertakings that you would meet any taxes of the company after it has been struck off.
The method to strike off a company at companies house is simply completion of a one page form and payment of £10 fee. Notice of company strike off would be published in the London Gazette and if no objection is raised, company would be 'dissolved' after a three month period. HMRC monitor all such published notices and if you have not requested / informed them of strike off prior to the notice being published then chances are that HMRC will object.
Speak to your Accountant - this is all fairly standard so should not be a problem.
However, whilst the CGT route may be more effective for taking out £17k (since you have £9,600 in current tax year to draw upon tax free, with balance likely to be taxable at only 10% under 'entrepreneurs relief' regime), there are a number of conditions that must be met. Your Accountant should also consider your other income in the year to compare what tax you would pay on a dividend (i.e. are you a higher rate taxpayer or not in year of distribution).
As long as these conditions are met and it will stack up to be more tax efficient, you would basically apply to HMRC for clearance for the capital route under the concession and secondly provide HMRC with some formal undertakings that you would meet any taxes of the company after it has been struck off.
The method to strike off a company at companies house is simply completion of a one page form and payment of £10 fee. Notice of company strike off would be published in the London Gazette and if no objection is raised, company would be 'dissolved' after a three month period. HMRC monitor all such published notices and if you have not requested / informed them of strike off prior to the notice being published then chances are that HMRC will object.
Speak to your Accountant - this is all fairly standard so should not be a problem.
Hi Eric - Likewise!!
How is January and the tax return deadline going for you? I am in work at the mo, sadly getting light relief by answering tax queries on PH!! Do you work for yourself?
Will check into this forum every now and then I think to provide some FOC advice where needed to fellow car lovers!!
Dan
How is January and the tax return deadline going for you? I am in work at the mo, sadly getting light relief by answering tax queries on PH!! Do you work for yourself?
Will check into this forum every now and then I think to provide some FOC advice where needed to fellow car lovers!!
Dan
Hi Dan / Eric
Me and my fellow director are in this postion we are closing the company at the end of march and will be left with £300k in the bank, It has all had corparation tank paid on it.we were going to put into a pension rather than pay 40% tax is there any alternative to getiing the money with less tax.
Me and my fellow director are in this postion we are closing the company at the end of march and will be left with £300k in the bank, It has all had corparation tank paid on it.we were going to put into a pension rather than pay 40% tax is there any alternative to getiing the money with less tax.
DanX5 said:
Hi Eric - Likewise!!
How is January and the tax return deadline going for you? I am in work at the mo, sadly getting light relief by answering tax queries on PH!! Do you work for yourself?
Will check into this forum every now and then I think to provide some FOC advice where needed to fellow car lovers!!
Dan
Yep - working too - and will be tomorrow for at least some of the day. Now the norm at this time of the year.How is January and the tax return deadline going for you? I am in work at the mo, sadly getting light relief by answering tax queries on PH!! Do you work for yourself?
Will check into this forum every now and then I think to provide some FOC advice where needed to fellow car lovers!!
Dan
I do work for myself and have done for the past seven years.
prostang said:
Hi Dan / Eric
Me and my fellow director are in this postion we are closing the company at the end of march and will be left with £300k in the bank, It has all had corparation tank paid on it.we were going to put into a pension rather than pay 40% tax is there any alternative to getiing the money with less tax.
I think Dan has already covered that in previous reply - optimisiation of basic rate tax bands through divs and a Capital Distribution on closure of company qualifying for CGT Entrepeneur's reduced rate CGT.Me and my fellow director are in this postion we are closing the company at the end of march and will be left with £300k in the bank, It has all had corparation tank paid on it.we were going to put into a pension rather than pay 40% tax is there any alternative to getiing the money with less tax.
prostang said:
Hi Dan / Eric
Me and my fellow director are in this postion we are closing the company at the end of march and will be left with £300k in the bank, It has all had corparation tank paid on it.we were going to put into a pension rather than pay 40% tax is there any alternative to getiing the money with less tax.
Yes, that is an option if putting into a pension is your wish. As you can imagine a number of people would rather keep their money outside of a pension scheme, depending on their stage of life and investment strategy. I assume in your case that after pension cont'n there will be nothing left in co so you will just strike off? Me and my fellow director are in this postion we are closing the company at the end of march and will be left with £300k in the bank, It has all had corparation tank paid on it.we were going to put into a pension rather than pay 40% tax is there any alternative to getiing the money with less tax.
Have you claimed corporation tax relief within the company on the pension contribution? Just wondering really as there has been much debate over the last couple of years since pension 'A-Day' as to whether large pension contributions to owner manager schemes are actually 'wholly and exclusively' for the benefit of the trade (i.e. the thing you need to convince HMRC of in order to claim tax relief)?
Under current CGT rules, disposals of "Business Assets" (which include shares in a trading company) are taxed at 10% compared to the normal 18%. Therefore, if you could extract your money as proceeds of a disposal of shares, then the 10% rate would apply - as would your normal annual CGT allowance (currently £9,600).
Dividends aren't subject to Income Tax unless the recipient is a Higher Rate tax payer.
So, manipulation of the above rules could allow a shareholder tp extract their money with minimal tax impact.
Dividends aren't subject to Income Tax unless the recipient is a Higher Rate tax payer.
So, manipulation of the above rules could allow a shareholder tp extract their money with minimal tax impact.
Prostang - to keep it simple, the answer is yes.
Go for the capital route (as long as you meet the criteria) and simply take the cash out as a capital gain (once you have obtained HMRC clearance). Without going into the criteria in detail (but do let me know if you want chapter and verse), then assuming that the funds you are taking out are retained profit as opposed to being a return of capital invested as shares, then should be easy to do.
To expand on Erics comment whilst trying to keep things basic, I will assume that you and fellow director / shareholder each set up the company as a new co for £1 each share capital AND have no other capital gains during the year. Your tax bill on drawing out the £150k each would be:
Proceeds £150,000
Less cost (£1)
Gain £149,999
Less AE (£9,600)
Chargeable £140,399
CGT @ 10% £14,039.90 (due 31/1/2010 assuming you do all this before 5/4/2009)
You should note that this is dependant upon the company which you are disposing of fully qualifying for the relatively new 'Entrepreneurs Releif' (meaning a 10% rather than 18% rate). Again, your Accountant should be able to check this so I won't give chapter and verse.
So, you will be left with over £135,000 from your £150,000 retained profits. This is compared to £112,500 if you simply withdrew as a dividend (i.e. you would otherwise pay 25% higher rate tax on the net dividend, based on you saying that you are already a higher rate taxpayer).
One last thing that has just come to mind is that there is a pitfall if your company has been set up with significant share capital (rather than just 2 x £1 shares). Care needs to be taken as the official reciever could invoke the bono-vacatia (I think this is how you spell it, latin's not my strong point) rules for share capital illegally distributed over a certain amount and officially reclaim monies as belonging to the Crown. This is because a company can only return share capital to shareholders under a FORMAL liquidatin rather than this voluntary route (this would cost a few ££ in insolvency practitioner fees though) subject to a ceoncession.
As I have said previously, this is fairly standard so your Accountant should be able to handle no problem. But if you have any reservations about their competence then make sure you go elsewhere as a mistake could ultimately cost a lot of tax. Let me know if I can be f help any further.
Go for the capital route (as long as you meet the criteria) and simply take the cash out as a capital gain (once you have obtained HMRC clearance). Without going into the criteria in detail (but do let me know if you want chapter and verse), then assuming that the funds you are taking out are retained profit as opposed to being a return of capital invested as shares, then should be easy to do.
To expand on Erics comment whilst trying to keep things basic, I will assume that you and fellow director / shareholder each set up the company as a new co for £1 each share capital AND have no other capital gains during the year. Your tax bill on drawing out the £150k each would be:
Proceeds £150,000
Less cost (£1)
Gain £149,999
Less AE (£9,600)
Chargeable £140,399
CGT @ 10% £14,039.90 (due 31/1/2010 assuming you do all this before 5/4/2009)
You should note that this is dependant upon the company which you are disposing of fully qualifying for the relatively new 'Entrepreneurs Releif' (meaning a 10% rather than 18% rate). Again, your Accountant should be able to check this so I won't give chapter and verse.
So, you will be left with over £135,000 from your £150,000 retained profits. This is compared to £112,500 if you simply withdrew as a dividend (i.e. you would otherwise pay 25% higher rate tax on the net dividend, based on you saying that you are already a higher rate taxpayer).
One last thing that has just come to mind is that there is a pitfall if your company has been set up with significant share capital (rather than just 2 x £1 shares). Care needs to be taken as the official reciever could invoke the bono-vacatia (I think this is how you spell it, latin's not my strong point) rules for share capital illegally distributed over a certain amount and officially reclaim monies as belonging to the Crown. This is because a company can only return share capital to shareholders under a FORMAL liquidatin rather than this voluntary route (this would cost a few ££ in insolvency practitioner fees though) subject to a ceoncession.
As I have said previously, this is fairly standard so your Accountant should be able to handle no problem. But if you have any reservations about their competence then make sure you go elsewhere as a mistake could ultimately cost a lot of tax. Let me know if I can be f help any further.
You don't have to be selling the company to anyone to get the CGT treatment, just ceasing the company and voluntarily winding it up.
That is the whole point of it being a concession to treat such a transaction as a capital ditribution rather than a dividend. The concession allows the funds on winding up to be drawn out much like in the way that a return of monies to investors by a liquidator when a larger company goes bust. Otherwise a sale to a third party would ALWAYS be a capital gains tax transaction.
So in your situation where you have an unquoted trading company that has ceased trading but has cash left in it (i.e. the accumulated undrawn profits) then you CAN treat it as a capital gain (subject to meeting all criteria).
See http://www.hmrc.gov.uk/manuals/ctmanual/CTM36220.h... - a bit dry reading but relevant to your scenario I think.
That is the whole point of it being a concession to treat such a transaction as a capital ditribution rather than a dividend. The concession allows the funds on winding up to be drawn out much like in the way that a return of monies to investors by a liquidator when a larger company goes bust. Otherwise a sale to a third party would ALWAYS be a capital gains tax transaction.
So in your situation where you have an unquoted trading company that has ceased trading but has cash left in it (i.e. the accumulated undrawn profits) then you CAN treat it as a capital gain (subject to meeting all criteria).
See http://www.hmrc.gov.uk/manuals/ctmanual/CTM36220.h... - a bit dry reading but relevant to your scenario I think.
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