Tax efficient way to withdraw 270k accumulated profit from ltd company

[Waldorf]

Remember that there is a General Election in progress, tax rules could change in the next few months so you will need to decide soon. There's a chance any new tax rules could be more favourable although I would doubt this.

[Patrick@Intouch]

Aside from all of the really good and valid points already made it should be pointed out that going permie may allow you to claim the distribution as a capital gain and apply entrepreneur's relief as HMRC's guidance states that employment is not included in "same or similar trade or activity".

This is only the guidance however and the legislation (as above) is sufficiently woolly as to allow HMRC to change to guidance to include employment should they wish to do so.

[ChimpMaster]

A quick question though (or may be for separate post if it is too big for a discussion), I have 70K director's loan taken from company from last few years and paying legitimate interest rate to company to avoid P11D benefit. Do I need to clear this DL prior to MVL or can this be adjusted from CG payment via accounting books?
Only difference here is if it has to be paid via dividends, then I'll end up paying 32.5% whereas if it can be adjusted from CG somehow, it would attract at the most 20% tax.

Yes, you'll need to settle the DLA, I think, but you'll need to speak to your accountant and MvL provider on these details. For example, the DLA could be a problem insofar as you've presumably (or should have) paid the S.455 charge, which is refunded in the year following the DLA being settled, so there's quite a long wait, potentially, until the DLA is resolved.

Looks like S455 will apply if you've had the loan for that long. This should have been picked up by your accountant already else it could get a little messy.

Apart from S455, if you MVL then you can usually clear the loan through a 'paper transaction' distribution, though of course this distribution is subject to the prevailing CG tax rate.

[jamesbrown]

A quick question though (or may be for separate post if it is too big for a discussion), I have 70K director's loan taken from company from last few years and paying legitimate interest rate to company to avoid P11D benefit. Do I need to clear this DL prior to MVL or can this be adjusted from CG payment via accounting books?
Only difference here is if it has to be paid via dividends, then I'll end up paying 32.5% whereas if it can be adjusted from CG somehow, it would attract at the most 20% tax.

Yes, you'll need to settle the DLA, I think, but you'll need to speak to your accountant and MvL provider on these details. For example, the DLA could be a problem insofar as you've presumably (or should have) paid the S.455 charge, which is refunded in the year following the DLA being settled, so there's quite a long wait, potentially, until the DLA is resolved.

[samsg30]

Thanks James.

Reading articles on TiS and MVL more carefully, you are correct that if HMRC believes liquidation is for tax purpose only, then distribution can be considered as dividend with 38.1% tax.

I'd most probably be joining permi anyways and may switch to umbrella in case bored of permi and get a good opportunity to avoid that 2 yrs rule.

However if I am lucky enough to get contract in the dying technology I am working for, then may be higher dividend upto 100K seems only option as I am already investing in pension and not sure what other investments (for personal benefit) can be done with profit funds in company... unless you have some bright idea.

A quick question though (or may be for separate post if it is too big for a discussion), I have 70K director's loan taken from company from last few years and paying legitimate interest rate to company to avoid P11D benefit. Do I need to clear this DL prior to MVL or can this be adjusted from CG payment via accounting books?
Only difference here is if it has to be paid via dividends, then I'll end up paying 32.5% whereas if it can be adjusted from CG somehow, it would attract at the most 20% tax.

[b r]

not for me

No pockets in a shroud mate

[jamesbrown]

James... the way I read '2 years' rule introduced in 2016 is affecting ER instead of deciding if payment after MVL is CG or Dividend.
11K exemption is allowed per year so yes it softens blow a bit but considering 270K here, remaining blow is too much to take

Is contracting through umbrella company for 2 years (which HMRC considers as permanent PAYE roll for people working inside IR35) would suffice that 2 years criteria for CG payment and 10% ER.

Also if not wrong, isn't new CG slab in this category is 18% (for basic rate) and 28% (for hither rate) and 10% only if ER is accepted?

Nope. It was a change to the TiS legislation, which is part of the Income Tax Act 2007 (IIRC), whereas ER is a completely separate relief and is defined in the Taxation of Capital Gains Act.

Contracting through an umbrella for two years is probably OK. Remember, nothing is really certain until it's tested.

The CGT rates were reduced in 2016 (for April 2017), except for gains on residential property. The new rates are 10% (basic) and 20% (higher/further) and there's an annual allowance of 11.1K. The ER rate of 10% is unchanged.

[samsg30]

James... the way I read '2 years' rule introduced in 2016 is affecting ER instead of deciding if payment after MVL is CG or Dividend.
11K exemption is allowed per year so yes it softens blow a bit but considering 270K here, remaining blow is too much to take

Is contracting through umbrella company for 2 years (which HMRC considers as permanent PAYE roll for people working inside IR35) would suffice that 2 years criteria for CG payment and 10% ER.

Also if not wrong, isn't new CG slab in this category is 18% (for basic rate) and 28% (for hither rate) and 10% only if ER is accepted?

[samsg30]

If you can get 10% by retiring (for 2 years), is that cost effect enough to balance out the lack of earning for 2 years?

For me this would be an easy one, but I'm in my 50's and have probably 2 years work at our house/garden plus biking 2-3 days a week :-)

not for me

[Fred Bloggs]

It's only 10% if your claim for ER is successful. Else it's 20%.

On £270k that means either £27k or £54k CG tax to allow for.

The 2 year rule applies regardless, if you go through MVL.

Certainly as you say, in many cases it could prove beneficial to take the 2 years off and enjoy the free time, whilst making a claim for ER after liquidation.

Don't the shareholders benefit from an annual CGT allowance too to soften the blow a bit?

[ChimpMaster]

If you can get 10% by retiring (for 2 years), is that cost effect enough to balance out the lack of earning for 2 years?

For me this would be an easy one, but I'm in my 50's and have probably 2 years work at our house/garden plus biking 2-3 days a week :-)

It's only 10% if your claim for ER is successful. Else it's 20%.

On £270k that means either £27k or £54k CG tax to allow for.

The 2 year rule applies regardless, if you go through MVL.

Certainly as you say, in many cases it could prove beneficial to take the 2 years off and enjoy the free time, whilst making a claim for ER after liquidation.

[b r]

If you can get 10% by retiring (for 2 years), is that cost effect enough to balance out the lack of earning for 2 years?

For me this would be an easy one, but I'm in my 50's and have probably 2 years work at our house/garden plus biking 2-3 days a week :-)

[jamesbrown]

Hi Guys,

Pl could anyone suggest the most tax efficient way to withdraw 270k of accumulated profit from limited company after contracting for more than a decade.

There are few posts I have read and as tax rules (and HMRC strictness) have changed quite a lot in last 2 years, looking for some updated ideas.

As per my limited knowledge, these are the 2 options I can think of but happy to get some valid ideas.

I am contracting at the moment and not sure if I'll join permi or continue contracting in coming few months. However I'd be changing technology for sure so won't continue doing contracting in the same field / technology which I have been doing for years.

PS: I am not looking to cheat or evade tax but to find most tax efficient manner to withdraw sum as any business would do.

1) Take less than 100K as dividend and salary every year and pay 32.5% tax on dividend over 43K.
- Cons - It will take 6-8 years to withdraw whole sum given that I'd be working alongside which will generate more income

2) Voluntarily liquidate company and take whole sum as capital gain and pay legitimate tax 28% if ER is rejected or 10% in case of ER (if I join as permi)
- Pros - All sum will be in pocket with less than 32.5% tax in any which case.
- Not sure though if I can close the company if I will start doing contracting immediately or after a break but in different technology.

Can't think of any other idea.

Appreciate your views.

Thanks
Sam

Details aside, these are, indeed, the two main options if you don't want to defer the distribution or invest (e.g. pension).

However, in terms of the details, you may be confused about the relationship between a capital distribution and ER. Whether you can legitimately take a capital distribution (as opposed to a dividend distribution) upon closure is determined by the Transactions in Securities legislation. The bar for this was changed recently, as you may know, where a two-year period was codified in law for not undertaking "the same or a similar trade or activity". In other words, if you go permie, and it isn't a temporary sham to support a capital distribution, you're fine. Whether or not you can obtain the ER rate of 10% on the capital distribution is a separate question, but it's a much lower bar (and claimed via your SATR). In other words, if you can take a capital distribution at all, the chances are you can claim ER. If you're not going permie or retiring, there's a good chance you will not be able to take a capital distribution, but it really depends on the circumstances. It will not be enough to change the technology you're working on if you're carrying on the same or a similar trade.

[samsg30]

Hi Guys,

Pl could anyone suggest the most tax efficient way to withdraw 270k of accumulated profit from limited company after contracting for more than a decade.

There are few posts I have read and as tax rules (and HMRC strictness) have changed quite a lot in last 2 years, looking for some updated ideas.

As per my limited knowledge, these are the 2 options I can think of but happy to get some valid ideas.

I am contracting at the moment and not sure if I'll join permi or continue contracting in coming few months. However I'd be changing technology for sure so won't continue doing contracting in the same field / technology which I have been doing for years.

PS: I am not looking to cheat or evade tax but to find most tax efficient manner to withdraw sum as any business would do.

1) Take less than 100K as dividend and salary every year and pay 32.5% tax on dividend over 43K.
- Cons - It will take 6-8 years to withdraw whole sum given that I'd be working alongside which will generate more income

2) Voluntarily liquidate company and take whole sum as capital gain and pay legitimate tax 28% if ER is rejected or 10% in case of ER (if I join as permi)
- Pros - All sum will be in pocket with less than 32.5% tax in any which case.
- Not sure though if I can close the company if I will start doing contracting immediately or after a break but in different technology.

Can't think of any other idea.

Appreciate your views.

Thanks
Sam