Converting to Permie - Query on closing Ltd company

[minstrel]

Just to clarify there are two parts to this:

• ESC C16 - this is the agreement you need from your local tax office to allow the remaining money in the company to be treated as a capital distribution rathen than a dividend.
  
• Entrepreneurs Relief - allows you to pay 10% CGT (rather than 18%) on the capital distribution assuming ESC C16 is agreed. This is claimed via your personal tax return.

Ideally you should probably wait until ESC C16 is approved before taking the cash out, but I suspect it is unlikely any one would care if you withdrew the money from the company account before you get the ESC C16 approval from HMRC.

My previous accountant said this it was fine to take the money out straight away as long as VAT, Corporation Tax etc had been paid.

[Billy Pilgrim]

OK, thanks. It's something I'm also considering currently so just wanted an idea of how long it'd be before I could get my hands on the cash.

I think you can get your hands on the cash fairly quickly - whether you can (personally) keep 90% of it I think depends on you (personally) applying for Entrepreneurs releif doesn't it ????

Forgive me if I am wrong !!

[Mr.Whippy]

I think it depends on your local tax office, but I did it earlier this year and it only took a few weeks.

OK, thanks. It's something I'm also considering currently so just wanted an idea of how long it'd be before I could get my hands on the cash.

[minstrel]

Anyone know roughly how long it takes to get approval for ESC C16? weeks/months/years?

I think it depends on your local tax office, but I did it earlier this year and it only took a few weeks.

[Mr.Whippy]

Anyone know roughly how long it takes to get approval for ESC C16? weeks/months/years?

[minstrel]

Have you considered the tax benefits of investing in a pension?

I did actually think about that option too, but then decided it wasn't the best option.

It would probably be more efficient to use the wife's basic rate allowance to extract the money from the company and then for husband to make any pension contributions as a higher rate tax payer in his permie job.

Assuming a company £50k pre tax profit and husband moves into higher rate tax permie role.

Investing in pension direct from company gives £50k in pension fund.

Paying CT and distributing to wife results in £10k CT and £40k dividend. If the wife gives that £40k to husband and he puts it in a pension as higher rate tax payer the £40k will be given 20% tax relief automatically when he invests putting £50k in the pension pot. He'll then get a further £10k of relief when he does his self-assessment tax return.

So you'd be £10k better off distributing to wife and making personal pension contribution rather than doing a direct company contribution.

[Old Greg]

Have you considered the tax benefits of investing in a pension?

[minstrel]

...the only likely thing that HMRC can raise an eyebrow with is "does not intend to trade or carry on business in future" - the other points should be an easy box tick.

I would have thought assuring that the company "does not intend to trade or carry on business in future" should be an easy tick box too. After all, the company is going to be struck off and won't exist, so it will not be possible to trade.

Is there anything I'm missing as to why HMRC might raise an eyebrow?

[centurian]

I too - am contemplating a move to the "dark side" - no doubt I will be required to hand in my badge and gun at the door of this board.

The big problem is that with the salary of the potential job, if I take dividends on my retained profits, it will push me into the 50% tax bracket - not to mention the loss of personal allowance over 100K (roughly another 4%), so I am also looking at ESC C16.

Realistically, it is a given that HMRC will approve. Looking at http://www.hmrc.gov.uk/specialist/esc.pdf (page 62), it seems the only likely thing that HMRC can raise an eyebrow with is "does not intend to trade or carry on business in future" - the other points should be an easy box tick.

[minstrel]

If your wife has no other income then it might be best to give your wife 100% of the shares and make the distribution as dividends not as an ESC C16 capital distribution. Maybe this is what your accountant was suggesting?

The reason for this is capital distribution will have 10% CGT on distribution amounts over £10k, but dividends will have no further tax to pay if your wife stays under higher rate threshold. If there is too much in the company to fit under higher rate threshold, you could always make a distribution now and then another one next tax year.

If there is less than £10k left after you've distributed dividends and hit wife's higher rate threshold you could then use ESC C16 capital distribution and avoid waiting until next year.

[decentguy]

Hmm

I spoke to my accountant and he is of opinion that its best if I give 100% shareholdership to my wife and then file for ESC C16.

Reason he believes is that because I am working as a permie now, I will have a high personal tax to pay if I split company income 50-50 between myself and my wife.
As my wife is not working, she can pretty much take all money and pay least tax

Bit confused...we are talking about good 40k here which is currently sitting in company

[decentguy]

Many thanks. I am going to do my research on this and advise my accountant accordingly. Sounds like a great way to close company if I can get hold of money within 2-3 months of closing company (hope HMRC approval does not take too long)

Thanks again

[Greg@CapitalCity]

Most likely you will get the best result by closing down your company using ESC C16 (there are still rumblings this will be removed so I suggest do this quickly if you are going to go down this road). You should stop paying yourself any dividends immediately, so that once you get your ESC C16 approval from the HMRC, you can take all retained earnings out as a capital gain. So long as you have been trading for a year or longer you will pay 10% personal tax on the capital gain (with the first £10,6000 coming to you tax free, assuming you have no other capital gains this year).

Might be worth keeping the shareholding at 50/50 - then you get £10,600 tax free, and your wife will get the same. Taking £21,200 out of your business with no associated personal taxes sounds like a great position to be in.

[decentguy]

Hi Guys

I thought I will never do this but it is happening. I am converting from a contractor to a permie role. Team lead role, VP etc etc has tempted me to give a go (Money (salary and guaranteed bonus) is pretty good too from a permanent perspective)

Anyway, I now have to close my company and ensure that I extract all money from company account and pay least tax.

What are the options for me to close company and what is most efficient way to pay least tax.

To ensure that my personal tax does not climb too high, I am going to withdraw myself as 50% shareholder of company and make my wife as 100% shareholder. Reason for this is that I dont want to pay higher tax as I will be already doing that on my new salary in my new perm job