Holding large amounts of cash company reserve account

[MarillionFan]

To avoid paying higher rate tax!

Surely that depends over what period you have attained it.

You can split an allowance with a partner(other director) at lower rate tax. Probably about 6k each salary, plus a top up to 40k (so 80k). Top a salary up and then go with a salary sacrafice for child care (for example)

You can also pay into a pension fund.

So unless you're seriously into the high rate tax band each year, are you sure you're making the best use of other allowances?

[tangent]

My wife is earning, so I cannot pay her much. I usually turnover somewhere between 150k and 200k per year, depending on how much time off I can get away with, so am racking up my reserve account. I would like to pay 50-100k into my pension, but do not know what the risks are of doing this. I know it is probably ok, but I do not want to draw attention to myself and get an inspection.

[Old Greg]

Why don't you close the company down and pay the 10% entrepreneur's thingy tax. Continue working through a brolly until it's closed down and then open up a new Ltd.. There seems to be a mixed view on the acceptability of this but my own accountant has not experienced problems with this (at least the first time you do it).

[tangent]

Why don't you close the company down and pay the 10% entrepreneur's thingy tax. Continue working through a brolly until it's closed down and then open up a new Ltd.. There seems to be a mixed view on the acceptability of this but my own accountant has not experienced problems with this (at least the first time you do it).

Interesting idea Old Greg. Just done a few calculations on this. With profits that were taxed at 21%, the 10% entrepreneur's tax translates into an additional 7.9% of the original profit, and with profits taxed at 20%, the effective tax rate is an additional 8%. I do not particularly want to pay any more tax but I can see 2 advantages. The first is I can get at the money earlier. The second is that it removes the risk/uncertainty of a HMRC inspection. Presumably HMRC would not be interested in my company after it has been closed down correctly. I have 2 questions on this though:

1) How much does it cost to close down a company?
2) Would HMRC scrutinise everything? i.e. would the closing down cause an inspection?

[ChimpMaster]

1) How much does it cost to close down a company?
2) Would HMRC scrutinise everything? i.e. would the closing down cause an inspection?

T, I did this some time ago when it was still known as Taper Relief, though admittedly I did not have "hundreds of thousands" in the company. My accountant only charged his usual fee for this, though I have heard of unscrupulous accountants charging £1,500 for this service (for an existing client!).

HMRC will need to authorise the closure and finalise the accounts, though they rarely do this in a detailed manner. I think it's a small risk compared with the resulting advantages (which you are aware of as per your previous post).

It might be better to await a break in contracts before you do this though, as it's more logically seen that way.

[tangent]

Thanks ChimpMaster,

The lack of detailed HMRC scrutiny on closing a company is reassuring. I am in no great rush to get money out of my company at present, as my wife would probably be keen to spend a sizeable chunk of it. I am looking to retire from this contracting lark in a couple of years time, so may just finsh the accounts for the year I stop, which usually happens about 6 months after year end, pay the CT for the year (9 months) and wind up after that.

Nobody seems to recognise any problem with keeping large amounts of cash in a company, which is a relief.

[THEPUMA]

Thanks ChimpMaster,

The lack of detailed HMRC scrutiny on closing a company is reassuring. I am in no great rush to get money out of my company at present, as my wife would probably be keen to spend a sizeable chunk of it. I am looking to retire from this contracting lark in a couple of years time, so may just finsh the accounts for the year I stop, which usually happens about 6 months after year end, pay the CT for the year (9 months) and wind up after that.

Nobody seems to recognise any problem with keeping large amounts of cash in a company, which is a relief.

Hi Tangent

I do not believe that the CIC rules apply in your case. Many of our clients operate as you describe and we have never encountered this as a problem.

When the taper relief legislation was in place, there used to be a facility to write to HMRC for clarification that your company was a trading company. We used to send letters on all of our clients with substantial deposits and they always confirmed that they agreed with us that this did not jeopardise trading status, albeit in the context of taper relief rather than corporation tax. Eventually, they wrote to us to ask us to stop writing to them on this subject!

My rule of thumb is that 20% of assets, income, profits or management time need to relate to investment activities for there to be a problem and cash on deposit does not count as an investment.

The intention of most of our clients is to do as you describe, namely to accumulate cash in the company until retirement then pay it out as a lump sum which should be subject to 10% CGT. As an alternative, some opt to pay the residual cash out as a quasi-pension as dividends of circa £40K per annum can be paid to someone with no other sources of income tax-free. This means that the 10% can be avoided but it takes longer to get your mitts on the filthy lucre!

Puma

[ChimpMaster]

<snip>
As an alternative, some opt to pay the residual cash out as a quasi-pension as dividends of circa £40K per annum can be paid to someone with no other sources of income tax-free. This means that the 10% can be avoided but it takes longer to get your mitts on the filthy lucre!

Puma

Tax-free?

[THEPUMA]

Tax-free?

Personal tax free. Corporation tax would already have been paid by that point.

Puma

[tangent]

Hi Puma,

Thanks for your reassuring words about not getting caught by the CIC rules for holding too much cash in reserves. As interest rates are so low at the moment, I am considering investing some of the company cash into preference shares. These pay dividends between 7% and 8% instead of the miserly rates offered by the banks. Also, preference share dividends come with a tax credit, so no extra CT is paid on them. I would hold these for quite a few years so even if the price went up a bit I would be unlikely to pay CT on a capital gain due to indexation allowance. If I went down this route and put 100k into preference shares, do you think that I would then be in danger of breaching the CIC rules? i.e. provided the pref dividend income was below 20% of profits, do you think this would be ok?