Thinking about retiring? Need to wind down your business? If you are planning on liquidating your company then you need to time it correctly for maximum tax efficiency. In 2010, the tax rules for payments made when you are winding down a company changed. As it now stands, only where the total value of the company isn’t over £25,000 will the cash you receive be taxed as capital (unless you liquidate). Instead it will be subject to income tax.
In terms of capital gains tax treatment, capital payments have the advantage of being chargeable to capital gains tax at either 10% or 20%. However income tax on payments from a company can be charged at up to 38.1%. As a result, it’s more effective to liquidate your company to ensure capital gains tax treatment. However, there is another alternative…
If you are planning on using the value of your company to fund your retirement, the most tax efficient way of doing so would be to leave the cash in your company without liquidating it. Instead, draw the money out as dividends over a stretched period of time. This allows you to take advantage of the lower income tax rate for dividends of 7.5%. Here’s an example for you:
Melanie runs a landscape gardening firm, which she set up from scratch with £1 of share capital. Her firm holds £80,000 of cash plus equipment worth £130,000. She sells this equipment, now giving the company £210,000. She withdraws £20,000 each year & as she’s a basic rate taxpayer with no other income, she will only pay £1,125 (£5,000 at 0% + £15,000 x 7.5%)
However if you need the capital and you pay tax at higher (32.5%) or additional (38.1%) rates our then our example won’t work. In this case it would be better to extract the money by formally liquidating the company. You will pay liquidators fees (around a minimum of £1500) but the tax saving from paying capital gains instead of income tax will inevitably save you much more.
But you have to time your liquidation properly. If the company has a mix of assets e.g. cash and goods, the liquidator can release the cash quite quickly but you’ll need time to sell your assets. Every time money is released to you it counts as a payment of capital against which you can use your annual capital gains exemption.
The best thing to do is to start the liquidation process towards the end of the tax year. This reduces your capital gains tax bill, as you may be able to use different exemptions. Here’s an example…
Belinda’s company is in the same position as Melanie’s. She liquidates the company in early Feb 2017. Having paid all the company’s debts by then, the liquidator can release £70,000 against which she can set her 2016/17 annual capital gains tax exemption (£11,100). After some of the company’s assets have ben sold several months later, the liquidator pays Belinda another lump sum, which falls in 2017/18, & she can use her capital gains tax exemption (£11,100 of more) for that year.
This second example shows how you can maximize the capital gains tax annual exemption simply by timing your liquidation correctly. It’s worth remembering though; it’s the liquidator who controls the flow of cash and the company. So always consult with your accountant well in advance of any planned liquidation to allow us to advise you on the likely timing of payments.
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