Leaving cash in ltd business long term

[spoovy]

I'll be going permie at the start of the new tax year (for the foreseeable future, though hopefully not forever), and I'm planning on buying a house (my first) this year at some point too. I have approx 50k in the business bank account which I don't need for the deposit.

I'm quite nervious about taking on a large mortgage and associated risks, so I'm thinking to mitigate this maybe I could leave this cash in the company account when I go permie, and treat it as a "guaranteed income" safety net in case I find myself out of work. With that cash I could pay myself a salary for two years or so and keep paying the mortgage while looking for contract work.
The more likely scenario I think would be that the cash just sits there for the next two or three years while I work permie.

I realise I could close the business and claim entrepreneurs relief but not only would I end up paying 10% tax that way, the cash would end up either burning a hole in my pocket or locked up in an investment, neither one of which is preferable to having a guaranteed income for two years.

So is this a sensible idea or am I overlooking something important, or does anyone have a better idea? I'm aware that I couldn't lock all the cash away in bonds etc without becoming classed as a closed investment company so I wouldn't do that; I'm prepared to take a (smallish!) hit from the cash value being eroded by inflation.

Thanks

[ShandyDrinker]

You probably need to take advice from your accountant, if you have one.

If it were me, I'd be getting any money out of the business sharpish before they change/scrap ER and/or increase CGT in the March budget.

[northernladuk]

Sounds like your money management is the problem. Burning a hole in your pocket or locked up are not the only two options available and are probably the worst as well.

What about getting an offset mortgage using the 50k. If you are worried about a large mortgage then offsetting means your payments will be lower and you get to keep the 50k without locking it up.

[spoovy]

Sounds like your money management is the problem. Burning a hole in your pocket or locked up are not the only two options available and are probably the worst as well.

What about getting an offset mortgage using the 50k. If you are worried about a large mortgage then offsetting means your payments will be lower and you get to keep the 50k without locking it up.

Thanks I wasn't aware of offset mortgages, I'll definitely look into that as depending on the mortgage rate I get that could even match the tax liabilities from ER over five years ish.

[spoovy]

You probably need to take advice from your accountant, if you have one.

If it were me, I'd be getting any money out of the business sharpish before they change/scrap ER and/or increase CGT in the March budget.

Thanks I will consult the accountant; just asking the experienced bods on here too.

I don't see how ER reductions and/or CGT increases would affect me if I stuck to my plan though? Granted I would still have to take the cash out at some point, but if all went well over the next few years I'd pay the remaining cash (I'd still be taking tax-free dividend allowance out each year) into a pension fund at whatever rate at the time incurred 0% tax.

[Lance]

Thanks I will consult the accountant; just asking the experienced bods on here too.

I don't see how ER reductions and/or CGT increases would affect me if I stuck to my plan though? Granted I would still have to take the cash out at some point, but if all went well over the next few years I'd pay the remaining cash (I'd still be taking tax-free dividend allowance out each year) into a pension fund at whatever rate at the time incurred 0% tax.

yes you could leave it for a few years and extract slowly. Don't forget £2k a year of tax free dividends as well.
But have you factored in the costs of servicing a LTD company? It's not free. It's not expensive either but is part of the equation you should consider.

[ladymuck]

yes you could leave it for a few years and extract slowly. Don't forget £2k a year of tax free dividends as well.
But have you factored in the costs of servicing a LTD company? It's not free. It's not expensive either but is part of the equation you should consider.

If savvy, the costs shouldn't be too high and could be considered akin to management fees one pays on pensions and investments (if you don't do them yourself). Good call out though as those costs will chip away at the remaining capital.

[spoovy]

yes you could leave it for a few years and extract slowly. Don't forget £2k a year of tax free dividends as well.
But have you factored in the costs of servicing a LTD company? It's not free. It's not expensive either but is part of the equation you should consider.

Thanks for the reply. I was thinking of dropping the accountant and insurance policies straight away, as there will likely be no turnover while I'm a permie and I've timed the switchover to end neatly with this tax year. If I did lose the permie role I'd get them back again pronto of course. I'll look into the other costs as you suggest. Ta.

[spoovy]

If savvy, the costs shouldn't be too high and could be considered akin to management fees one pays on pensions and investments (if you don't do them yourself). Good call out though as those costs will chip away at the remaining capital.

Thanks for the reply. So what's the savvy way to do it?

[ShandyDrinker]

Thanks I will consult the accountant; just asking the experienced bods on here too.

I don't see how ER reductions and/or CGT increases would affect me if I stuck to my plan though? Granted I would still have to take the cash out at some point, but if all went well over the next few years I'd pay the remaining cash (I'd still be taking tax-free dividend allowance out each year) into a pension fund at whatever rate at the time incurred 0% tax.

Like when the dividend tax was first introduced, even if you say the ER/CGT changes won't affect you, I can guarantee that dividend changes will. The allowance might be at £2k and 7.5% now at the lowest levels, but as they've been in place for a few years now, who is to say they won't change these again?

Remember when the Tories said they won't increase income taxes and thus proceeded to effectively tax dividends more?

As others have mentioned, if you haven't hit the thresholds on pension contributions and already have a SIPP in place, I'd put as much into the SIPP as possible, probably being the most tax efficient way of extracting the money although granted can't be spent right now.