Reply to: Taper relief vs Dividends

[Nixon Williams]

Are there any limitations on starting up again under a different company? Otherwise it seems like a loophole that is begging to be closed

Yes, it is a concession so it is not given as of right - abuse it and you will not get it granted.

[boredsenseless]

YES - The concession is granted on the basis that the company has ceased trading and will be struck off.

Alan

Are there any limitations on starting up again under a different company? Otherwise it seems like a loophole that is begging to be closed

[Nixon Williams]

YES - The concession is granted on the basis that the company has ceased trading and will be struck off.

Alan

[Mickmanus]

wind up

ESC16 is a concession but they tend to grant it.....we haven't had one turned down yet!

It's a great idea, the more you retain in the company, the more you save....obviously not everyone will be able to keep most of the money in the company due to living costs, but it's certainly worthwhile in some cases.

Do you have to wind up the company for this to work?

[ASB]

Usual route when making use of taper relief is to pay a minimum salary and the rest in dividends upto the 38.3k threshold, then take the rest as taper relief.

Just wondered whether it would be more tax efficient to take a lower amount in dividends and leave a greater amount in the company, which could be taken as taper relief.

An extreme example: take a min salary of 5k, no dividends. Build up the rest and take it all as taper relief after a couple of years. - Assuming you could live on that wage for the time being.

turbo

No, because:-

1) If you don't use the lower allowance in any given year you use it forever
2) When the capital distribution is made anything over the relieved amount is the same as income

Thus if in 1 year you retain an extra 30k then you are exposing the relieved amount asd taxation. In any event the maximum you can retain per sharehold before CGT will kick in in approximately 40k - so some care need to be taken with high retentions.

Of course it is possible that the regimes will differ during the time the money is being accumulated so that could work for or against.

If you do go for esc c16 then I guess it is just possible you might be able to phase payments over a number of payments whjich might help mitigate the CGT. It's also a good ide not to have any other income or chargeable gains in that year.

From a personal perspectiv I only ever retained after using as much of the normal rate as possible, and it worked out pretty well for me.

[Darren@UptonAccountants]

Tax

ESC16 is a concession but they tend to grant it.....we haven't had one turned down yet!

It's a great idea, the more you retain in the company, the more you save....obviously not everyone will be able to keep most of the money in the company due to living costs, but it's certainly worthwhile in some cases.

[turbo]

lets just remember that access to taper relief via esc. c.16 is a concession by the tax people. They can refuse it and there is no guarantee that it will be available in the future.

Good point, I guess it makes sense to take the money out as and when you can.

turbo

[where did my id go?]

lets just remember that access to taper relief via esc. c.16 is a concession by the tax people. They can refuse it and there is no guarantee that it will be available in the future.

[turbo]

Thanks for the example minstrel!

Just wonder if this has any other indirect advantages, e.g. the low salary, high dividend route is sometimes frowned upon - perhaps this could be a way to avoid that? But I guess as long as you can show you're outside of IR35, there's no reason to do that.

turbo

[minstrel]

Is there any reason why you can't keep pay the dividends over a number of years staying under the 40% bracket? So based on 300K profit (-19% corporation tax), you'd pay your dividends over 7 years.

No reason why you can't pay the dividends over 7 years, but what are you going to do with the additional £400k profit you make in years 4 to 7?

Something you could do though if you want to take 4 years off or can afford to retire.

[minstrel]

I was going to say the same as minstrel. But no point now is there.

Sorry

[VectraMan]

I think you'd be no better off and probably marginally worse off.... doh!

Is there any reason why you can't keep pay the dividends over a number of years staying under the 40% bracket? So based on 300K profit (-19% corporation tax), you'd pay your dividends over 7 years.

[MarillionFan]

I was going to say the same as minstrel. But no point now is there.

[minstrel]

Just wondered whether it would be more tax efficient to take a lower amount in dividends and leave a greater amount in the company, which could be taken as taper relief.

As I understand it you would be no better off and probably marginally worse off if you were to take a lower amount in dividends.

You pay 19% corporation tax on company profits regardless of whether you go the dividends route or the capital distribution/taper relief route.

Providing you keep below the Higher Rate Threshold you'll have no further tax liability (beyond the 19% CT) on any dividends you receive. However, if you go the capital distribution/taper relief route you will have additional tax liability on the capital gain.

For example, lets assume you have profits of £100k each year for 3 years and HRT is £38k. We'll ignore min salary because it will have a similar effect in each scenario.

Dividend Route:

Total profit (TP) = 3 x £100k = £300k
Corporation tax (CT) = £300k @ 19% = £57k
Dividends (D) = 3 x (£38k x 0.9) = £102.6k

Funds available for capital distribution (CD) = TP - CT - D = £140.4k

75% Taper Relief means tax is due on (£140.4k @ 25%) - £8.5k (CGT Exemption) = £26.6k

Capital Gains Tax due (CGT) = £26.6k @ 40% = £10.64k

In your back pocket using the dividend route over 3 years is roughly D + CD - CGT = £102.6k + £140.4k - £10.64k = £232k


100% Capital Distribution Route:

Total profit (TP) = 3 x £100k = £300k
Corporation tax (CT) = £300k @ 19% = £57k
Dividends (D) = 0

Funds available for capital distribution (CD) = TP - CT - D = £243k

75% Taper Relief means tax is due on (£243k x 25%) - £8.5k (CGT Exemption) = £52.25k

Capital Gains Tax due (CGT) = £38k @ 22% + £14.25k @ 40% = £8.36k + £5.7k = £14.06k

In your back pocket using the 100% Capital Distribution Route over 3 years is roughly D + CD - CGT = £0k + £243k - £14.06k = £229k


It's only £3k difference so no big deal, but I definitely can't see any merit in not taking full dividends up to the 40% threshold each year.

[turbo]

Whats taper relief? I've never heard of it.

Seriously?

Seems to have been mentioned on these boards a fair bit...

Check out the 83% tax planning method outlined on the SJD site, that makes use of taper relief.

turbo