Much has been publicised recently about the financial pressure on businesses. Many owners are having sleepless nights worrying that all the funds that have been earned in the past may be lost in this period of high inflation and huge energy costs. They are mentally and physically exhausted after keeping their companies afloat through the pandemic and perhaps considering whether this is a good time to cease trading and extract accumulated funds from their business.
How can you take your money out of the business?
If there is less than £25,000 to extract, then the procedure is simple. You can take the money out and apply to strike the company off and have it dissolved. The extraction of funds will be classed as a capital distribution for tax purposes. But if you are looking to extract larger amounts then you have two alternatives.
Your first option is to keep the company in existence and reduce the accumulated funds over a number of years by paying a combination of salaries and dividends to the shareholders. This may not be the best plan as you will have the continued worry of looking after your company as well as incurring ongoing costs, even if it ceases to trade. On top of this, you have to look at the rate of tax being charged on your salary and dividends, especially if you are a higher-rate taxpayer.
Is there a tax-efficient way of extracting funds?
Luckily, at the moment, there is. Option two would be to place your company into Members’ Voluntary Liquidation (MVL). In a nutshell, this is a means of closing down a solvent company with over £25,000 of assets. Funds extracted are taxed as capital distributions rather than income, and you may be entitled to Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief). This in effect means that you can take funds out of your company at a tax rate of only 10%.
What are the tax implications and rules around business liquidation?
There is a lifetime limit of £1 million on gains that can benefit from Business Asset Disposal Relief. Also, there are anti-avoidance rules to stop a business owner from liquidating their company, extracting funds at 10% tax rates then starting up the same trade within two years. If you fall foul of these rules, HMRC will go back to the capital distributions and re-tax them as income dividends at a rate of up to 38.1%. Also, there will be costs involved in liquidating a company, so careful planning is required before a decision to liquidate is made. This planning will also include the timing of the distributions in the liquidation. For example, you may consider making capital distributions over two tax years. This will allow the capital gain to be reduced by two amounts of annual exemption.
The decision to cease trading and liquidating your company to extract accumulated funds is not to be taken lightly. However, if this is the strategy that is right for you then careful planning and the use of an MVL can maximise the benefit of your hard work in the past.
If you’d like help to decide the best route for your business, please get in touch with our restructuring and insolvency team on 0808 144 5575 or email help@armstrongwatson.co.uk
