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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 14218
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi Tony I am drawing up a business plan at the moment and

Customer Question

Hi Tony

I am drawing up a business plan at the moment and have a 6 year exit strategy. I will have retained profit of £300k per annum after corporation tax and would like to know the most tax efficient way of extracting? Would it be to retain profits in co then have a capital distribution upon company windup (attracting higher rate of CGT at this prospective time) or to dividend it out to myself each and every year? I don't think I my Retained profits would be "qualifying assets" for entrepreneurs' relief at the end of this 6 year period either?

Many thanks

David O
Submitted: 1 year ago.
Category: UK Tax
Expert:  Tony Tax replied 1 year ago.
Hi.

Can you tell me what the nature of your business is please.
Customer: replied 1 year ago.

Hi there it is a city bar restaurant business on a leasehold basis.


 


I am about to make an offer for the business so am calculating my potential return.


 


You are my first port of call, I have a tax background actually but am out of touch!


 


Thanks


 


David

Expert:  Tony Tax replied 1 year ago.
Thanks.

I'm drafting my answer now.
Expert:  Tony Tax replied 1 year ago.
Hi again.

You would qualify for entrepreneurs' relief if you could sell your shares in the limited company assuming you will have run it as a restaurant and not just let the property or business to someone else to run. If you qualified for entrepreneurs' relief, you would pay Capital Gains Tax at 10% if the CGT rules as they are now are the same at the time you are ready to sell up. Clearly, the terms and length of the lease would have an influence on the value of your business.

Another way to get entrepreneur's relief as opposed to selling your shares in the limited company would be to put the business through a formal liquidation and then make a capital distribution and claim ER on the gain. Take a look at the notes on entrepreneurs' relief here.

If you simply roll up post corporation tax profits at £300,000 per annum, paying that out as a dividend in one tax year would leave you with a huge higher rate tax liability of the order of £536,000 at today's tax rates. Take a look at the notes on dividends and tax here. It would make far more sense to make dividend payments annually to use the lower tax rates.

Whilst high salaries are costly in terms of tax and national insurance contributions , another option would be to set up a pension scheme for yourself though you could not access the funds until you reached the age of 55 at the earliest. There are, however limits on the value of pension funds beyond which they become tax inefficient. The limit is about to be reduced to £1.4 million.

You could also reinvest some or all of the proceeds of the sale of the business into new business assets, thereby deferring some or all of the CGT you would otherwise pay under the business asset rollover relief rules. You can read about those here.

You really ought to seek out some face to face advice with an accountant specialising in business planning who can take a look at the business in detail with a view to making recommendations as I can really only give you a few pointers in a place such as this site.

I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.

Hi thanks for the answer.


 


I don't think the business could be sold as a going concern as the leasehold expires in 6 years. Therefore ER would not be an option in that regard.


 


I am 29 so would want access to my cash before 55 so pension not of interest.


 


I'm very interested in the possibility of a liquidation and subsequent capital distribution. Would the ER still apply as the ONLY asset on the Balance Sheet at point of liquidation would be the cash bank balance which would have been rolled over each of the 6 years? I thought cash was a non-qualifying item for ER?


 


PS your link to ER was actually PPR on the Revenue manuals :)


 


Thanks


 


David

Expert:  Tony Tax replied 1 year ago.
You can find the ER helpsheet here. My apologies for the rogue link.

This is a grey area. There are rules around cash held as an investment as opposed to as working capital but I've never seen a case whereby substantial cash balances have been excluded from an ER claim on the winding up of a genuine trading company even if the cash had been built up from undistributed profits.

Cash itself can be a business asset. However, where the cash has been avtively invested in non-business assets, that can cause a problem for an ER claim. HMRC are aware that ER was created by the government to encourage new businesses and is not keen to trample all over that. I would say, however, that if some of the cash can be distributed as dividend up to the lower end of the 40% tax bracket it would probably help but whether you would avoid higher rate tax would depend on any other income you had.

So long as you spend the substantial amount of your time running the restaurant business as opposed to administering a cash deposit which takes no time at all, I'd be surprised if your claim to ER was challenged.

The only problem I have with your situation is that your business has a finite life, albeit more than is required to qualify for ER but I still don't see that being a major problem. Take a look at the link labelled "The duck test" here for some analysis of the potential pitfalls. Some of the other links also have some useful commentary.

I'm afraid nobody can say what the tax office attitude to a cash rich company will be in six years time quite apart from the fact that the ER rules may be substantially different.

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