It’s probably the central issue of owner managed business tax planning – you’ve got a company has got cash in it, and you want to get that cash out without cutting the taxman on too larger share.
Well, I thought it would be fun this month to have a quick rundown of the ways it’s possible to take money out of one’s own company not just tax efficiently, but completely tax free. I hope goes without saying I’m not talking about anything under the counter, because of course that can come back to bite you, and we’re talking strictly tax planning not tax evasion!
Repayment of Capital
Most OMB companies are set up these days with no more than a nominal share capital, say £1, or say £100. In the old days it used to be more common to issue shares as a first resort in raising sufficient money to get the company’s business off the ground, you still come across companies with a more substantial issue share capital, of perhaps £50,000, £100,000 or more. If you’re a PLC (even if not quoted) there’s a legal requirement to have issued share capital at least £50,000 (although some clever people manage to get round this – I’ve even heard it said that you can use a loophole in the rules to keep your PLC share capital as low as £12,500).
Changes in company law have actually made repaying such share capital more straightforward than it was before, and if the company pays you no more than par, there’s no tax consequence. If the company pays more than par, this would usually be treated as a dividend, and therefore there’s not a lot of point doing this purely as a tax wheeze.
What goes for share capital also goes for loan capital, informal director’s loans, of course. These can be repaid to the lender without tax consequence in the very rare situation where more is paid back than was originally loaned.
Business Entertaining
This is a bit of a specialist one, maybe, but it certainly comes into the category a way of extracting money from the company, effectively, without any personal tax. Business entertaining is disallowable for the purpose of working out your profit, however that entertaining may be to the company’s business. But providing it is genuine business entertaining, that is the people you take out to lunch or dinner, have a sufficient connection with the business to justify it commercially, what the rules don’t is treat you, the main directors of the company, as receiving any sort of benefit in kind. So in the right circumstances you end up having taken money from the company, and spend it on a slap up meal, which you’ve enjoyed, tax free. Worth thinking about if your circumstances fit the bill.
Pension Contributions
I’ve made no secret of my lukewarm attitude to pensions elsewhere, and I should stress that this is a very personal thing. To me, pensions suffer from a number of major drawbacks to counteract the tax benefits of contributions allowable deductions against income, the scheme investments exempt from income tax and capital gains, and the pension fund being outside your estate for inheritance tax. To go against these strong government incentives for investing in a pension you’ve got the loss of control; the inability to invest in most interesting types of investment, in particular residential property; the fact that the bulk of the money is taxed when it gets paid out to you as a pension in any event; and the fact that the government are always prodding and changing the rules. But there are situations where the tax free nature of pension fund contributions can be quite interesting – even exciting. Let’s have a look at a straightforward example.
Cuthbert has a personal pension worth about £800,000 all of it invested in the liquid form of a commercial property. His company, Cuthbert & Cuthbert Limited, has £100,000 in cash that it doesn’t need for the business and that Cuthbert would dearly like to take out of the company. Unfortunately, if he did this in the “standard” way as a dividend he would be paying about £38,000 of it away in income because he’s a top rate income taxpayer.
As it happens, though, he’s also passed the retirement age for a pension, and after taking properly specialist pension advice, it transpires that the company is permitted to make a £100,000 pension contribution on his behalf into the scheme. Because it’s an approved scheme, this contribution is entirely tax free, but it provides his pension fund with liquid funds which he can then use to make a tax free lump sum payment to himself (generally speaking it’s possible to take 25% of your pension fund out as a lump sum payment, with the rest, if it gets paid out, being taxable income).
Swapping Assets for Cash
I mentioned the ability to pay back amounts that the company owes you tax free, because they’re just repayments of what you’ve already put in. But what if you haven’t got any credit balance with the company on loan account? Well, you could consider creating one!
This can be done by transferring a valuable asset of some kind to the company. Because this is a piece about ways of getting money out of the company completely tax free, I should stress, to this criterion, you need to ensure that the asset you transfer to the company isn’t such as to give rise to a capital gains tax charge. So if you have a building, for example, which is worth more than you paid for it, transferring the building to the company would certainly give you a substantial director’s loan account balance to draw on, in all probability, but it would also trigger a capital gain on you personally. But there are all sorts of assets that don’t do this, for example cars, assets that haven’t gone up in value since you acquired them, and various categories of exempt asset.
One of the first questions I always ask a client or prospective client whose pose me the tax planning conundrum, of how to minimise tax on taking money out of a company, is: “What are you going to spend the money on?” Very often its in order to invest the money outside the scope of the company itself. If so, one way to do this without triggering tax for the company either to invest in an LLP set up alongside it for investments, or to loan the money to a parallel company (which again might be a member (corporate) of an investment LLP). In our view the LLP can be so set up that all future capital gains on such investments accrue directly to you as the individual member, brought into the LLP for this purpose. So it may be that, from the most important point of view, this is equivalent to personal ownership of whatever the investment is (often a property). But the way you’ve done it, if you follow this suggestion, means that the money has come out of the company to buy the investment without triggering any tax charge.
And you can turn this idea on its head. Let’s suppose that you have an asset, like an investment property, or a fine wine collection, or a classic car collection, or whatever that has a value but which you don’t want, for various reasons, to transfer to your company to create a loan account as I described above. Well, one thing you can do in these circumstances is to set up a parallel investment LLP and put those assets into the LLP. The result will be a credit to your capital account or a loan account with the LLP: the LLP effectively “owes you” the value what you’ve put in. the next stage in the process might be to admit your company (or a parallel investment company) into membership of the LLP. Money from your trading company can then find its way of capital introduction into the LLP the cash is then sitting in the LLP, and remember, you have a capital balance with the LLP which it can pay to you without tax. So at the end of the day, you can easily end up with money coming out of the company per your esteemed order and being paid into your own personal bank account, with no tax. You could describe this as “unlocking” the value of any personally held assets you might have outside the company.
(A note of caution: if the company with the money in it loans the money to another company which then introduces it into an LLP, and you take that money straight out of the LLP, there’s some anti avoidance legislation you need to steer clear of, which could treat that as equivalent to a loan to you from the original company. Best to take detailed advice there is a chain of payments of that sort.)
Thinking Outside the Box
One of the fascinations of being a tax adviser, specialising in such things as tax free or tax efficient extraction of funds from a company, is the fact that all situations are different. The above list of tax wheezes is all derived from real life situations in my job, but I can’t say it’s an exhaustive list, because if I said that, another idea would come up as a result of a new client’s fresh circumstances. The key is to think outside the box and to allow the mind to range freely over the all the “what if” questions you can think of.
Alan Pink
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