Going perm - what to do with distributable income?

[Adlopa]

within two years of receiving a capital distribution from an MvL, that capital distribution is liable to being reclassified as a dividend distribution.

Ah, I get it now. Thanks for illuminating that point.

[jamesbrown]

I meant rather than new income taken as dividends through another Ltd company (avoidance?). While there's no tax advantage to operating as a sole trader (quite the reverse), I guess there is in winding up the company rather than continuing to operate it in a much reduced fashion –*though maybe one could argue there's little point in operating a LTD with next-to-no revenue after the main stream has ceased. One to discuss with my accountant in more depth, it seems.

I think you're confused about the TAAR, but I suggest you read it. If you're carrying on the same or a similar trade (whether via a Ltd or as a sole trader) or activity within two years of receiving a capital distribution from an MvL, that capital distribution is liable to being reclassified as a dividend distribution. To prevent this, you need to retire, veritably change the trade (e.g. if you're currently in IT, that probably means doing something outside of IT altogether) or become an employee of some company that is not run by a connected person, which might include becoming an employee of an umbrella company (debatable). In short, the TAAR is very widely drawn, so forget about trying to circumvent it.

[Adlopa]

As opposed to what? Evaded?

Anyway, yes.

I meant rather than new income taken as dividends through another Ltd company (avoidance?). While there's no tax advantage to operating as a sole trader (quite the reverse), I guess there is in winding up the company rather than continuing to operate it in a much reduced fashion –*though maybe one could argue there's little point in operating a LTD with next-to-no revenue after the main stream has ceased. One to discuss with my accountant in more depth, it seems.

[jamesbrown]

Would this be the case even though all of this additional sole-trader income would be declared and therefore taxed at the higher income-tax rate?

As opposed to what? Evaded?

Anyway, yes.

[Adlopa]

Can you not draw down on retained profits year on year until there's nothing left and then close down the company? Your accountant would be able to advise the most efficient way

Unless I'm missing something, wouldn't this be a case of just using the current £2k annual dividend allowance? It would take some time to draw the whole lot that way...

Clearly, it's a trade. If the trade were the same or similar then, yes, this would be caught by the TAAR (since all other conditions are likely to be met), so any capital distribution received within two years of your pursuing the same or similar trade as a sole trader would be liable to reclassification (from a capital distribution to a dividend distribution), were it to be investigated.

Would this be the case even though all of this additional sole-trader income would be declared and therefore taxed at the higher income-tax rate?

[jamesbrown]

but will then operating as a sole trader count as starting a new business?

Clearly, it's a trade. If the trade were the same or similar then, yes, this would be caught by the TAAR (since all other conditions are likely to be met), so any capital distribution received within two years of your pursuing the same or similar trade as a sole trader would be liable to reclassification (from a capital distribution to a dividend distribution), were it to be investigated.

[BR14]

Just spend it? and damn the torpedoes

[ladymuck]

Can you not draw down on retained profits year on year until there's nothing left and then close down the company? Your accountant would be able to advise the most efficient way

[mudskipper]

You could bung a load into a pension, making use of any unused allowance for the last 3 (?) years, if pensions are your thing

Bear in mind that you can only carry forward unused allowance if you already had a pension in place.

[Hobosapien]

Most sensible options seem covered, so how about something less obvious:

1. Use Ltd for BTL, if you intend buying a property anyway. No reason you can't rent it from your own Ltd and buy it from the Ltd without capital gains tax when the house price crash finally arrives.

2. Re-purpose Ltd as a sports car hire company or chaperone foreign holiday company. You or your family can hire the car or chaperone your partner/family on holidays.

3. Use Ltd to run a side business that generates passive income of some sort or requires less of your day to day time (maybe get someone else to run it), so you can keep it going while deciding if permiedom is your foreseeable future.

3. Sell the Ltd to another contractor or someone looking for a ready made company with a track record, to buy it off you for the current profit in the bank. There's some additional value to a Ltd if it has years of good history, so more valuable than a new off the shelf company.

Not sure how viable any of the above are, but it may give you some ideas that are a bit more interesting than the norm.

[fidot]

You could bung a load into a pension, making use of any unused allowance for the last 3 (?) years, if pensions are your thing

[TheCyclingProgrammer]

I would either pay yourself up to the dividend allowance limit (£2k), MVL if you really don't think you'll need the company again, or leave the profit in there for a rainy day - if you decide to start contracting/freelancing you'll have a warchest ready and waiting.

[Adlopa]

I've been made a perm offer I'm thinking of taking, but while I'll no longer be contracting if I do, I/the business will still service a few freelance clients until at least the end of the tax year -- just in case things don't work out and to fulfil various obligations.

The problem (if you can call it that) is what to do with the distributable income still in the business. Taking it all as dividends this year and next will mean paying higher-rate tax and while I have uses for the money, I don't need it *that* badly.

So pending a conversation with my accountant, what are the sensible options? Sticking the money in a business savings account for a rainy day seems to be delaying the inevitable for little benefit, so a tax-efficient siphon into a SIPP seems like a better choice -- but also means little or no accessible funds should permie life be short-lived.

Alternatively, I could close the company via MVL this year and claim entrepreneur's relief (no problem with my set-up) -- but will then operating as a sole trader count as starting a new business? And that would also screw things up if I do need to make a hasty return to contracting. So maybe just moving the money into a savings account and sitting tight until April next year to use MVL would be no bad thing -- I should know by then if the change is bearable...

Anyone else had to make this kind of decision? (This similar thread fizzled out...)