Reply to: Getting money out of Ltd co I'm leaving

[TheCyclingProgrammer]

Sounds like the simplest, most pragmatic approach to me. Focus on building up your new company's profits and treat any dividends received from the old company as a bonus.

[achillea]

Right, I've spoken to both accountants and have decided to leave the money where it is and draw down from it as usual in pension/salary/dividends whilst building up reserves in NewCo when I start my next contract.

The proposal of a share-for-share exchange should work although this would need to be cleared by HMRC and there is always the risk that they would not accept it. My old accountant says that although the shares are categorised as ‘A’ and ‘B’ shares, this only allows you to pay different rates of dividends and there is no separate allocation of the capital value of the two businesses to the separate category of shares. It could therefore be argued that there is a value to your share in OldCo, represented by the underlying value of the two businesses and not just the reserves that you have stripped out. The only way to protect against this is to seek agreement from HMRC on the valuation. This can be done on a ‘post transaction ‘ basis for which there is a formal HMRC procedure. It is hassle but it does give you certainty and is not guaranteed.

Dividends paid by one company to another would not be liable to corporation tax as earlier post described.

I don't think I fancy raising attention with HMRC and as I haven't fallen out with business partner I'll just have to live with it for another year.

Many thanks for the contributions.

[TheCyclingProgrammer]

Dividends are tax free in the hands of corporations, they are 'Franked Investment Income' so not taxed to avoid double taxation. The initial company paying the dividend has already paid corporation tax on that profit so it shouldn't be taxed again. They are grossed up and used in working out your corporation tax rate though i.e. if you are eligible for small companies rate so paying large dividends between companies could, in some circumstances, increase the companies corporation tax liability.

Martin
Contratax Ltd

Martin - thanks a lot for answering my question. TIL, as they say...

[ContrataxLtd]

There is the theory that a company with large cash balances would be seen as an investment company, and therefore not entitled to ER. That's a theory though, and I've not heard of it being challenged in Court. My personal view is that if the cash balances result from trading and you're not actively managing them to get a return, you'd be OK. If you're investing the cash and have a lot of income from interest then that may be effecting the advice you're getting from your own accountant.

I'd agree completely with this! I was actually on a tax conference just last week and the speaker quoted that pretty much word for word and went as far as saying he had read a HMRC update stating the same. However, I've been unable to find that update. I believe the OP is talking about ~£80k so I don't think that would be considered 'large' by HMRC anyway in this respect.

Out of interest (to anybody who knows the answer): I find it hard to believe that dividends received by a company that owns shares in another company aren't taxed in some way. We all know how dividends are taxed from an income POV but what happens when the shareholder is a corporation? It seems strange to me that you could transfer shares to NewCo (and as Martin says, even if you transfer them for nothing, you're likely to be assessed for CGT on the full market value of your shares) and then declare a dividend which NewCo receives tax free.

I appreciate you'll still get taxed the same whether you draw dividends from NewCo or OldCo and are just trying to find a tax efficient way of transferring your capital in the old business to the new one, but this doesn't seem right to me.

Dividends are tax free in the hands of corporations, they are 'Franked Investment Income' so not taxed to avoid double taxation. The initial company paying the dividend has already paid corporation tax on that profit so it shouldn't be taxed again. They are grossed up and used in working out your corporation tax rate though i.e. if you are eligible for small companies rate so paying large dividends between companies could, in some circumstances, increase the companies corporation tax liability.

Martin
Contratax Ltd

[Clare@InTouch]

That was the original idea although my accountant thinks there is a very good chance that HMRC would disallow the ER due to all the assets being cash... not sure I understand that but couldn't find anything to this effect when I looked on the HMRC site.

There is the theory that a company with large cash balances would be seen as an investment company, and therefore not entitled to ER. That's a theory though, and I've not heard of it being challenged in Court. My personal view is that if the cash balances result from trading and you're not actively managing them to get a return, you'd be OK. If you're investing the cash and have a lot of income from interest then that may be effecting the advice you're getting from your own accountant.

[achillea]

That was the original idea although my accountant thinks there is a very good chance that HMRC would disallow the ER due to all the assets being cash... not sure I understand that but couldn't find anything to this effect when I looked on the HMRC site.

I'm coming to the conclusion that I just carry on taking my money out of OldCo at normal drip rate and I can have it all out early in the next tax year. Not a clean break but might just be the easiest thing.. and I don't get any unwanted spikes in earnings.

[TheCyclingProgrammer]

If you put it like that.... what I mean is I'd rather not take a big tax hit by taking it all out in one go. If I put the money into NewCo then draw it down in salary and dividends over time (as I would if it was still in OldCo) I'm still paying tax but just not in one fell swoop and spread over a few tax years. The added benefit is that the NewCo also has some cash reserves at the start.

All I really want to do it keep the money in the business rather than extract it all.... clearly an unreasonable demand!

This is all fair enough, but the scheme you propose still potentially results in a CGT charge on your gain from giving away the shares to NewCo.

Can the shareholders of OldCo not buy you out? You'd still have to pay CGT potentially but you might be eligible for ER which would reduce the rate to 10%. This seemed to be what you were discussing originally. Is it still not an option?

[achillea]

Do those two statements not contradict each other?

If you put it like that.... what I mean is I'd rather not take a big tax hit by taking it all out in one go. If I put the money into NewCo then draw it down in salary and dividends over time (as I would if it was still in OldCo) I'm still paying tax but just not in one fell swoop and spread over a few tax years. The added benefit is that the NewCo also has some cash reserves at the start.

All I really want to do it keep the money in the business rather than extract it all.... clearly an unreasonable demand!

[TheCyclingProgrammer]

Personally I wouldn't be that worried about the alphabet shares as it sounds like a genuine and reasonable arrangement to me.

As several others have said, the share transfer between companies doesn't sound right to me. IANAA and I know your accountant has advised this but you've already got one accountant on here raising their eyebrows!

Out of interest (to anybody who knows the answer): I find it hard to believe that dividends received by a company that owns shares in another company aren't taxed in some way. We all know how dividends are taxed from an income POV but what happens when the shareholder is a corporation? It seems strange to me that you could transfer shares to NewCo (and as Martin says, even if you transfer them for nothing, you're likely to be assessed for CGT on the full market value of your shares) and then declare a dividend which NewCo receives tax free.

I appreciate you'll still get taxed the same whether you draw dividends from NewCo or OldCo and are just trying to find a tax efficient way of transferring your capital in the old business to the new one, but this doesn't seem right to me.

[TheFaQQer]

Ref money transfer I don't see it as avoiding tax as the money sits with the company and not me and I would still be paying the same amount of tax when I take dividends out of NewCo... I just don't personally want to withdraw all of the cash and would rather keep it in the company coffers...still, what do I know? At this rate I'll end up staying with the OldCo for a couple of years until I've drawn everything down.... not ideal but I'd rather do that than loose a big chunk in income tax or CGT.

Do those two statements not contradict each other?

[TheFaQQer]

At this rate I'll end up staying with the OldCo for a couple of years until I've drawn everything down.... not ideal but I'd rather do that than loose a big chunk in income tax or CGT.

Why not set up the new company and start working through that, and take money out of the current company over the next few years as dividends as you need to?

If you keep working via the same company, then you are never going to resolve the issue - you'll keep putting money into that company and still be wondering how to get the money out.

[ContrataxLtd]

Ref A&B shares, both my OldCo accountant and NewCo accountant see the arrangement as appropriate treatment. We both do different types of work (one interim, the other software sales/consultancy) and have different classes of shares to reflect that (albeit with same voting rights).

Ref money transfer I don't see it as avoiding tax as the money sits with the company and not me and I would still be paying the same amount of tax when I take dividends out of NewCo... I just don't personally want to withdraw all of the cash and would rather keep it in the company coffers...still, what do I know? At this rate I'll end up staying with the OldCo for a couple of years until I've drawn everything down.... not ideal but I'd rather do that than loose a big chunk in income tax or CGT.

I'll get the other accountant to also look into the proposal before making a move.

Hi Again

If you are happy taking the money as dividends over the next few years as opposed to capital now why don't you start up the new company and do what you want through that but also maintain a shareholding/directorship in the oldCo and draw dividends from there as/when fit until the pot runs dry so to speak?

Martin
Contratax Ltd

[achillea]

Ref A&B shares, both my OldCo accountant and NewCo accountant see the arrangement as appropriate treatment. We both do different types of work (one interim, the other software sales/consultancy) and have different classes of shares to reflect that (albeit with same voting rights).

Ref money transfer I don't see it as avoiding tax as the money sits with the company and not me and I would still be paying the same amount of tax when I take dividends out of NewCo... I just don't personally want to withdraw all of the cash and would rather keep it in the company coffers...still, what do I know? At this rate I'll end up staying with the OldCo for a couple of years until I've drawn everything down.... not ideal but I'd rather do that than loose a big chunk in income tax or CGT.

I'll get the other accountant to also look into the proposal before making a move.

[ContrataxLtd]

Back to the drawing board then... will double check the reasoning and report back. I don't want to do anything that isn't above board.

Let us know how you get on. In principle, I'd be fine with the A/B shares (to an extent) but it's just the getting money out of the company side which worry's me as you are entering into a string of transactions with the main aim to get a tax advantage out of and I personally don't see the string of transactions as being reasonable.

Martin
Contratax Ltd

[achillea]

Back to the drawing board then... will double check the reasoning and report back. I don't want to do anything that isn't above board.