Retained Profit - Best Uses

[Crossroads]

OK, similar to another thread on here, except I'm not looking to retire in the near future (well I am, but pensions are no good to me as I'm a long way from 55 so I don't want to tie my money up in one).

I'm fairly risk averse as I worked bloody hard to get the money. Well OK, fairly hard. Oh, OK, I turned up occasionally and fiddled with some servers. Alright, I didn't even do that, I just wrote some documents for other people to do the fiddling).

I object to paying tax, or rather I object to paying as much as I do as I get bugger all back for it, so anything that minimises this is a good thing.

What do others do:
- extract the money (either via ESC16 or Dividends) and pay off the mortgage
- invest within the company (e.g. property or shares)
- invest in "Plan B"
- invest in someone elses business
- A.N. Other

On a related note, has anyone here gone the ESC16 route with a significant sum (say £250k+)? I've seen conflicting advice that you don't get the concession with larger sums.

[Sockpuppet]

I'd say own mortgage.

When you have zero personal debt you are a lot more independent. No matter what the money markets do you have a house and as long as you can find the council tax each year they are not going to move you out.

Then you can do what you want. Investments can fail - paying off your own mortgage cannot.

[DaveB]

I'd say own mortgage.

When you have zero personal debt you are a lot more independent. No matter what the money markets do you have a house and as long as you can find the council tax each year they are not going to move you out.

Then you can do what you want. Investments can fail - paying off your own mortgage cannot.

This has been my approach for a few years now, however I'm starting to change my mind. With interest rates going up and having a fixed rate mortgage below the current base rate it might actually be worthwhile to stick any spare cash into a high interest account instead, as the return on that will might better than the effective return of reducing the debt on the mortgate. Stick the money into a Cash ISA, rather than a stocks and shares one to avoid the current market problems, and it's tax free as well. If things change the cash is readily available as well.

I need to sit down and do the sums but the initial idea seems promising.

[XLMonkey]

On a related note, has anyone here gone the ESC16 route with a significant sum (say £250k+)? I've seen conflicting advice that you don't get the concession with larger sums.

I don't think that there are any specific limits set on the ESC rules (see http://www.hmrc.gov.uk/specialist/esc.pdf page 67).

This is, after all, how all the venture capital companies manage to take millions of pounds in capital distributions whilst only paying 10% tax..... They set up a holding company that owns the "real" one, keep it for a few years (loaded with debt so that they don't make any profits), the use CGT taper relief to pay themselves a huge wedgy when they sell the real company on and dissolve the holding company.

Since the dispensation is granted at the discretion of the local tax inspector, it is possible in theory that they might decide not to do it. But I've not heard of any instances where this has happened.

[Hex]

See this page on Roger Sinclair's site: http://www.egos.co.uk/extracting_retained_profits.htm

Down at the bottom he suggests some limits outside of which the inspector may refuse taper relief - e.g. Surplus exceeding 100K or exceeding annual turnover.

No hard and fast rules though, just guidelines.

[Crossroads]

See this page on Roger Sinclair's site: http://www.egos.co.uk/extracting_retained_profits.htm

Down at the bottom he suggests some limits outside of which the inspector may refuse taper relief - e.g. Surplus exceeding 100K or exceeding annual turnover.

No hard and fast rules though, just guidelines.

I had seen that, as well as the HMRC guidance (next post up). HAs anyone any experience of getting ESC16 granted with larger sums?

[max]

I had seen that, as well as the HMRC guidance (next post up). HAs anyone any experience of getting ESC16 granted with larger sums?

The application does not include amount applied for.

Not part of the decision criteria.

[VectraMan]

I'd say own mortgage.

When you have zero personal debt you are a lot more independent. No matter what the money markets do you have a house and as long as you can find the council tax each year they are not going to move you out.

Then you can do what you want. Investments can fail - paying off your own mortgage cannot.

The question is, does the saving on the mortgage outweigh the 25% ish tax you have to pay on money you take as dividends over the upper rate?

[Waldorf]

Not all decisions are financial, I am personally happier that I no longer have a mortgage and rather than leave loads of cash in my company account, I can get it working better outside.

You have to pay the tax sometime, so get it over with, at least I can sleep easy.

[VectraMan]

Not all decisions are financial, I am personally happier that I no longer have a mortgage and rather than leave loads of cash in my company account, I can get it working better outside.

Personally I like the idea of having a secured income as far into the future as possible, so would be inclined to leave money in the business and/or invest it for the business.

It's not true that you have to pay the tax sometime. If you stay out of the upper rate you can keep paying yourself tax free dividends for years. It's only a problem if you keep working.