Closing my company and drawing out the retained profits (and capital)

[MiriamValentine]

Hello there!

I trust this is the right place to ask my question.

My husband used to go contracting but he hasn't this past year and we want to close his company, a sole directorship. We have a substantial amount of retained earnings and were wondering what the best way to draw it out was. As we want to liquidate the company I've been looking at both options of striking of the company and members' voluntary liquidation. I understand that this information is online, but I've simply not been able to get my head around it.

Please could somebody help? Any help is appreciated.

I'm trying to understand what the taxes are that we must pay and how much we might be able to draw out?

Thanks very much!

[Invisiblehand]

Liquidation is definitely an option to take advantage of entrepenuers relief. This option will however mean he cannot set up a new Limited Company for two years. If he's happy as a permie this is no doubt your best option financially speaking.

A regular poster on this forum owns a company called MVLonline. They seem to come recommended and would definitely be a good starting point.

[Patrick@Intouch]

If the company has more than £25,000 in net shareholders funds then a formal liquidation must take place.

Any distribution can be treated as a capital distribution so long as your husband does not continue in "the same or a similar trade or activity" during the two years following the liquidation of the company.

The definition of "same or similar..." has been left open in the legislation but HMRC's guidance currently states that they will not include permanent employment in that definition. That is not to say that they never will as they can change their guidance and the risk of any claim for entrepreneur's relief on the capital gain declared being overturned by HMRC should be considered.

Should your husband declare any distribution as capital gains and successfully apply entrepreneur's relief then he would pay tax at 10% on any gain made in excess of the annual exemption (currently £11,300).

Should the claim for entrepreneur's relief be overturned then any distribution may be viewed as dividend income and taxed accordingly.

[TheCyclingProgrammer]

This option will however mean he cannot set up a new Limited Company for two years.

Not necessarily, it depends on what the new company's trade/activity is.

[Cirrus]

how much we might be able to draw out?

If he's getting on a bit you can always bung it into pension. If you've not made contributions, you can use the last three years' allowances - something like £120k, then take out another £40k next year, and so on. Add that to your dividends and you'll empty the coffers at a reasonable rate of knots. Pension comes out of expenditure so you'll get a fat tax rebate from the Revenue.

When you are ready, you can draw it down, with the first 25% tax free.

[Invisiblehand]

Not necessarily, it depends on what the new company's trade/activity is.

Very true. An assumption was made on my part.

[ContrataxLtd]

If the company has more than £25,000 in net shareholders funds then a formal liquidation must take place.

Any distribution can be treated as a capital distribution so long as your husband does not continue in "the same or a similar trade or activity" during the two years following the liquidation of the company.

The definition of "same or similar..." has been left open in the legislation but HMRC's guidance currently states that they will not include permanent employment in that definition. That is not to say that they never will as they can change their guidance and the risk of any claim for entrepreneur's relief on the capital gain declared being overturned by HMRC should be considered.

Should your husband declare any distribution as capital gains and successfully apply entrepreneur's relief then he would pay tax at 10% on any gain made in excess of the annual exemption (currently £11,300).

Should the claim for entrepreneur's relief be overturned then any distribution may be viewed as dividend income and taxed accordingly.

Maybe I'm being a bit picky Patrick but if the claim for entrepreneur's relief be 'overturned' then the OP would still be in receipt of a capital distribution which would be taxed as such (10%/20% under current rules) and not as a dividend. The capital distribution itself would have to be challenged and denied for it to be taxed as a dividend.

Martin
Contratax Ltd

[Maslins]

Hi Miriam,

You'll find plenty of info about the benefits of an MVL on the MVL Online homepage. As Cirrus suggested, there may be other options like hefty pension contributions which potentially could be more suitable for your personal circumstances (eg if you don't need the cash now and the company had made big profits very recently so CT relief on huge contributions would be available), but really you'd need to discuss these kinds of things with your accountant.