Extracting profits tax efficiently

[schnoobsxo]

Hi there,

I’m really hoping to pay off my mortgage this year but I have just one problem: The funds I need to do so are currently sat within my company bank account.

So far I have run the following 3 scenarios and I am keen to understand if I am missing any other possible options that I might not be aware of yet:

Total outstanding mortgage debt to pay: £500k
Total profits available in company bank: £550k

How to extract these funds most tax efficiently?

Scenario 1
Extract the profits as dividends and pay income tax.
Cost for me to execute: approx 180-200k in tax
Balance after transaction: approx 300k - 320k

Scenario 2
Close company, claim entrepreneurs relief, pay 10% tax.
Cost for me to execute: £55,000 in tax
Balance after transaction: £495k

Scenario 3
Company buys property from me at current market value. Company pays stamp duty + legal fees. I pay capital gains + legal fees.
Cost to execute: approx £128k
Balance after transaction: Company would need to find approx another 128k to complete this transaction but I would be mortgage free at the end of it. Psychologically though, paying an additional £128k for a property I already own is a hard one to swallow.


I did also temporarily explore setting up an Employee Owned Trust (0% tax) but have shelved this idea for now.

At present, I’m considering going with Scenario 2, and accepting the major downside to this route which not only involves closing my company but also not being able to work in the same field for the next two years to comply with anti-phoenixing legislation. However, in the absence of other ideas/options it looks like it may be my best route forward.

Am I missing any other potential options?

Thanks in advance

[Spet0789]

Hi there,

I’m really hoping to pay off my mortgage this year but I have just one problem: The funds I need to do so are currently sat within my company bank account.

So far I have run the following 3 scenarios and I am keen to understand if I am missing any other possible options that I might not be aware of yet:

Total outstanding mortgage debt to pay: £500k
Total profits available in company bank: £550k

How to extract these funds most tax efficiently?

Scenario 1
Extract the profits as dividends and pay income tax.
Cost for me to execute: approx 180-200k in tax
Balance after transaction: approx 300k - 320k

Scenario 2
Close company, claim entrepreneurs relief, pay 10% tax.
Cost for me to execute: £55,000 in tax
Balance after transaction: £495k

Scenario 3
Company buys property from me at current market value. Company pays stamp duty + legal fees. I pay capital gains + legal fees.
Cost to execute: approx £128k
Balance after transaction: Company would need to find approx another 128k to complete this transaction but I would be mortgage free at the end of it. Psychologically though, paying an additional £128k for a property I already own is a hard one to swallow.


I did also temporarily explore setting up an Employee Owned Trust (0% tax) but have shelved this idea for now.

At present, I’m considering going with Scenario 2, and accepting the major downside to this route which not only involves closing my company but also not being able to work in the same field for the next two years to comply with anti-phoenixing legislation. However, in the absence of other ideas/options it looks like it may be my best route forward.

Am I missing any other potential options?

Thanks in advance

Could you not be your own bank and have your company lend you the money to repay the mortgage at an appropriate rate of interest?

You’d still be left with the choice between 1 and 2, but can choose when to incur the tax liability or shut down the company, at the cost of a very small corporation tax liability on the interest you pay.

[fisher]

Could you not be your own bank and have your company lend you the money to repay the mortgage at an appropriate rate of interest?

You’d still be left with the choice between 1 and 2, but can choose when to incur the tax liability or shut down the company, at the cost of a very small corporation tax liability on the interest you pay.

Presuming the OP is a Director of his company then this would be classed as a Director's loan and subject to some fairly punative tax and NI rules unless it is for less than 10k and it's repaid within 9 months of the company's year end. I'm out of date with the exact current rules but I believe Director's loans over 10k attract Class 1 National Insurance charges and also 32.5% corporation tax can be due on "long" loans, which may be repayable when the loan is paid back.

More details here: https://www.gov.uk/directors-loans/you- ... pany-money

[Dod101]

Frankly, I think this is all just an artifice, It sounds as though the company and the OP are actually one and the same. If that is the case then he should just take whatever is the most tax efficient way out of the situation and forget it.

Scenario 2 is surely the way to go. Nothing I imagine is illegal but I object to people getting tax breaks like this but at least the OP would be more or less repaying these with this route.

Dod

[Charlottesquare]

Hi there,

I’m really hoping to pay off my mortgage this year but I have just one problem: The funds I need to do so are currently sat within my company bank account.

So far I have run the following 3 scenarios and I am keen to understand if I am missing any other possible options that I might not be aware of yet:

Total outstanding mortgage debt to pay: £500k
Total profits available in company bank: £550k

How to extract these funds most tax efficiently?

Scenario 1
Extract the profits as dividends and pay income tax.
Cost for me to execute: approx 180-200k in tax
Balance after transaction: approx 300k - 320k

Scenario 2
Close company, claim entrepreneurs relief, pay 10% tax.
Cost for me to execute: £55,000 in tax
Balance after transaction: £495k

Scenario 3
Company buys property from me at current market value. Company pays stamp duty + legal fees. I pay capital gains + legal fees.
Cost to execute: approx £128k
Balance after transaction: Company would need to find approx another 128k to complete this transaction but I would be mortgage free at the end of it. Psychologically though, paying an additional £128k for a property I already own is a hard one to swallow.


I did also temporarily explore setting up an Employee Owned Trust (0% tax) but have shelved this idea for now.

At present, I’m considering going with Scenario 2, and accepting the major downside to this route which not only involves closing my company but also not being able to work in the same field for the next two years to comply with anti-phoenixing legislation. However, in the absence of other ideas/options it looks like it may be my best route forward.

Am I missing any other potential options?

Thanks in advance

You do need a little care with option 2 to ensure Business Assets Disposal Relief (Was ER) will bite, I have seen arguments why surplus cash in a company is covered and why it is not, individual circumstances/ trading etc need considered so professional advice is ideally needed to ensure the best case can, if need be, be made to HMRC if a challenge will arise. Irrespective to obtain capital treatment for sums over £25,000 you will need to appoint an insolvency practitioner to run the MVL process and they will need paid.

This article is worth a read:

https://www.taxadvisermagazine.com/arti ... lief-right

Option 3 may also have issues, especially if this is the residence you live in, for starters:-

1. Extra SDLT for company purchase of residential property
2. ATED may bite
3. Market rent or benefit in kind charge if you live in house.
4, Possible restriction on claim for additional IHT Residence Nil Rate Band re a dwelling if you die (as you maybe now no longer own a dwelling, you own shares which will possibly not qualify for BPR if you die (or maybe only partially qualify))
5. Future gains in property are not covered by PPR, company will instead pay Corporation Tax on any capital gain if company sells (and money still trapped in company with cost if you want to extract it)

The most important thing, given sums involved, is take paid for advice, do not rely on boards such as this. (I am rusty on all this as no longer practice but even when I did I would have sought advice from a decent sized firm of accountants, if in Scotland can thoroughly recommend Johnstone Carmichael)

[fisher]

Have a look on this forum too and maybe raise the question there. They have a lot of knowledgeable members.

https://www.contractoruk.com/forums/accounting-legal/

[pochisoldi]

For me option 3 is not actually an option, as you are replacing a liquid company owned asset for an illiquid one.

This is compounded by the other disadvantages already pointed out.

Your prime objective is to own a mortgage free home, not to indirectly own an encumbered property.

You are right to consider it, but unless we are talking about a farmhouse being bought by a farming company (where the property, in a literal sense "goes with the business"), this option should be the first one to be dropped.

Pochisoldi

[mark88man]

why just one year? this sounds like the sort of problem that a little time might help either by using pension allowances or maximising the amount taken at lower income tax bands

I imagine that post pandemic, there might not be a lot of sympathy from HMRC for synthetic transactions solely designed to reduce tax, so I would avoid the more contrived mechanisms. Also if I had £500K in a bank I would probably be looking for professional advice

[johnhemming]

The main point about this, however, is that although it is useful to discuss it in a forum you really should get a professional advisor (with indemnity insurance) to advise on it. If you get caught out by a technical point some time down the track it is really hard to fix this.

You also need to take into account other aspects of your finances. Again that is hard through a forum.

[schnoobsxo]

Morning all,

Firstly, thank you so much for all of the responses - really useful to see everyone's thoughts and opinions.

I take onboard the point about seeking professional advice and I certainly intend to do so - one of the reasons for asking the question here is that I have already sought some professional advice from one source, and they are directing me towards Option 3.

However, my primary interest is in understanding the "total cost to execute" through whichever route I take, and those I have sought advice from so far have only been concerned with sharing the costs that they will charge for their input rather than the total cost to me. For example, "we can setup a Holdco for the purchase of the property and it will cost X", as opposed to "We will charge X for our involvement, but your total cost will be around Y".

As someone who is not a finance expert or tax expert or property expert, I am not entirely sure who is best placed to provide me with truly impartial advice that isn't some way biased towards their own interests, which is why I thought I'd come here for a broader viewpoint and perhaps some direction.

Can anyone advise on what/who they would be seeking out in my position to discuss things further? Is it "Financial Advisor", "Tax Specialist", "Accountant"? The person I have spoken to so far is a Tax Adviser and owner of a Tax, Trust and Estate Planning firm. I may be wrong but I feel as though their advice has been somewhat skewed towards taking the route in which they can provide the most services along the way, which I don't blame them for. As I have no friends or family in my network that work in finance, tax, accounting etc I could do with some pointers as to who I should be speaking to for genuinely impartial advice.

In answer to the question about "why just one year?" - this has been many years in the making, and it's taken that long to build up these profits in my business, and so now that I can see the amount in my company bank account exceeds the amount of my personal mortgage debt, it's hard not to want to explore what options are out there to get that money out most tax efficiently. I appreciate that myself and the company are not one and the same, but as the sole shareholder/director of the business whose life goal is to pay off their mortgages and whose personal banking and corporate banking are both with the same bank (and therefore I can see the mortgage account and company accounts side-by-side in my mobile banking app), psychologically this feels like the right time to be having these conversations.

Many thanks in advance

[uspaul666]

If you're retiring and don't intend to start another company doing the same thing then a "Members' Voluntary Liquidation" is the most appropriate solution and the relief was put in place by HMRC for just that purpose. Just google "Members' Voluntary Liquidation" and you'll find a number of firms offering services. FYI, Ten years ago, a friend asked around and was told that If the company is entirely in cash, it'll cost about £5k in fees.

[Alaric]

In answer to the question about "why just one year?" - this has been many years in the making, and it's taken that long to build up these profits in my business, and so now that I can see the amount in my company bank account exceeds the amount of my personal mortgage debt, it's hard not to want to explore what options are out there to get that money out most tax efficiently.

The option of taking the maximum each year as dividend which avoids higher rate tax would surely be worth considering.

In retrospect allowing such a large sum to build up in the Limited Company might not have been such a wonderful idea if it had been possible to withdraw it in pieces to pay off the mortgage periodically.

On another track, is it possible your bank and mortgage provider can give you some form of offset deal?

[Johnspenceuk]

Hi there,

I’m really hoping to pay off my mortgage this year but I have just one problem: The funds I need to do so are currently sat within my company bank account.

So far I have run the following 3 scenarios and I am keen to understand if I am missing any other possible options that I might not be aware of yet:

Total outstanding mortgage debt to pay: £500k
Total profits available in company bank: £550k

How to extract these funds most tax efficiently?

Scenario 1
Extract the profits as dividends and pay income tax.
Cost for me to execute: approx 180-200k in tax
Balance after transaction: approx 300k - 320k

Scenario 2
Close company, claim entrepreneurs relief, pay 10% tax.
Cost for me to execute: £55,000 in tax
Balance after transaction: £495k

Scenario 3
Company buys property from me at current market value. Company pays stamp duty + legal fees. I pay capital gains + legal fees.
Cost to execute: approx £128k
Balance after transaction: Company would need to find approx another 128k to complete this transaction but I would be mortgage free at the end of it. Psychologically though, paying an additional £128k for a property I already own is a hard one to swallow.


I did also temporarily explore setting up an Employee Owned Trust (0% tax) but have shelved this idea for now.

At present, I’m considering going with Scenario 2, and accepting the major downside to this route which not only involves closing my company but also not being able to work in the same field for the next two years to comply with anti-phoenixing legislation. However, in the absence of other ideas/options it looks like it may be my best route forward.

Am I missing any other potential options?

Thanks in advance

Hi I faced a similar dilemma. I had 2 limited companies 1 hadn't traded since 2015 but had cash and some assets the other had traded till early 2019. In late 2019 it was decide to liquidate the second through an MVL as I/it qualified for ER. The other that hadn't traded since 2015 would not qualify in the eyes of HMRC as it had not traded in the previous 2 years. I am/will be withdrawing dividends in the non trading company for a number of years till exhausted.
The MVL process was more lengthy than I anticipated and the Insolvency Practitioner fee quotes varied significantly. I have had an initial distribution of about 95% in March 20 but the final distribution has been delayed I am told that because HMRC staff employed on MVL work have been deployed elsewhere and are unable to grant a final certificate to the I.P. which will allow the final distribution to take place.
Hope you find this useful regarding timescales currently.

Regards

John

[bluedonkey]

If you're retiring and don't intend to start another company doing the same thing then a "Members' Voluntary Liquidation" is the most appropriate solution and the relief was put in place by HMRC for just that purpose. Just google "Members' Voluntary Liquidation" and you'll find a number of firms offering services. FYI, Ten years ago, a friend asked around and was told that If the company is entirely in cash, it'll cost about £5k in fees.

Without going in to the specifics of this particular case, the MVL option 3 is typically the optimal solution. I mention this as the OP queried the tax specialist's advice, so my comment is addressed to that.

[Charlottesquare]

Morning all,

Firstly, thank you so much for all of the responses - really useful to see everyone's thoughts and opinions.

I take onboard the point about seeking professional advice and I certainly intend to do so - one of the reasons for asking the question here is that I have already sought some professional advice from one source, and they are directing me towards Option 3.

However, my primary interest is in understanding the "total cost to execute" through whichever route I take, and those I have sought advice from so far have only been concerned with sharing the costs that they will charge for their input rather than the total cost to me. For example, "we can setup a Holdco for the purchase of the property and it will cost X", as opposed to "We will charge X for our involvement, but your total cost will be around Y".

As someone who is not a finance expert or tax expert or property expert, I am not entirely sure who is best placed to provide me with truly impartial advice that isn't some way biased towards their own interests, which is why I thought I'd come here for a broader viewpoint and perhaps some direction.

Can anyone advise on what/who they would be seeking out in my position to discuss things further? Is it "Financial Advisor", "Tax Specialist", "Accountant"? The person I have spoken to so far is a Tax Adviser and owner of a Tax, Trust and Estate Planning firm. I may be wrong but I feel as though their advice has been somewhat skewed towards taking the route in which they can provide the most services along the way, which I don't blame them for. As I have no friends or family in my network that work in finance, tax, accounting etc I could do with some pointers as to who I should be speaking to for genuinely impartial advice.

In answer to the question about "why just one year?" - this has been many years in the making, and it's taken that long to build up these profits in my business, and so now that I can see the amount in my company bank account exceeds the amount of my personal mortgage debt, it's hard not to want to explore what options are out there to get that money out most tax efficiently. I appreciate that myself and the company are not one and the same, but as the sole shareholder/director of the business whose life goal is to pay off their mortgages and whose personal banking and corporate banking are both with the same bank (and therefore I can see the mortgage account and company accounts side-by-side in my mobile banking app), psychologically this feels like the right time to be having these conversations.

Many thanks in advance

I would be going to a decent size firm of accountants (but I would say that), the firm I mentioned for example are big enough to have broad experience but small enough that you will not get fobbed off on the near rookie in the tax team (I have an aversion to the larger firms) . JC are part of the PKF network but I will not hold that against them (I started with Hodgson Impey- rivals to PKF)., I used them when in practice as they offered a support network for smaller firms to refer clients with issues (with a no poaching promise) and the advice they offered was sound. You obviously want someone more local but their sort of size makes sense.

I would not use boutique firms who offer "structures" which are convoluted, also steer clear of IFAs who sometimes "sell" tax schemes, their tax knowledge is often just not good enough, in an ideal world I would want a CTA (Member of CIOT).

Without straying into professional advice I personally would be examining the wind up route as my first choice, this means ensuring favourable CGT treatment will bite and the excess cash will not be an issue, the other thoughts might need considered if favourable wind up is not possible, but this assumes you do want to cease the activity that gave rise to the retained cash in the business. I would be hesitant re corporate beasts as they will have costs year after year, the older I get the more the maxim KISS looms large in my thinking and tying on admin baggage costs for the future is can kicking.

Anyway good luck.

[bluedonkey]

I would not use boutique firms who offer "structures" which are convoluted, also steer clear of IFAs who sometimes "sell" tax schemes, their tax knowledge is often just not good enough, in an ideal world I would want a CTA (Member of CIOT).

Just registering my very strong agreement with this statement! "Structures" and "tax schemes" usually end up being regretted, though by the client rather than by those promoting them.

[Charlottesquare]

I would not use boutique firms who offer "structures" which are convoluted, also steer clear of IFAs who sometimes "sell" tax schemes, their tax knowledge is often just not good enough, in an ideal world I would want a CTA (Member of CIOT).

Just registering my very strong agreement with this statement! "Structures" and "tax schemes" usually end up being regretted, though by the client rather than by those promoting them.

Agreed, anything that needs an extra step to make a relieving provision operate/bite needs very careful thought, over the years we got offered gilt strips, SHEPs, film deals, lots of "manufactured" options; maybe I am just risk averse. (Forgot loan schemes/EBTs)

[bluedonkey]

I would not use boutique firms who offer "structures" which are convoluted, also steer clear of IFAs who sometimes "sell" tax schemes, their tax knowledge is often just not good enough, in an ideal world I would want a CTA (Member of CIOT).

Just registering my very strong agreement with this statement! "Structures" and "tax schemes" usually end up being regretted, though by the client rather than by those promoting them.

Agreed, anything that needs an extra step to make a relieving provision operate/bite needs very careful thought, over the years we got offered gilt strips, SHEPs, film deals, lots of "manufactured" options; maybe I am just risk averse. (Forgot loan schemes/EBTs)

The truth is that clients don't realise how aggressive these schemes are. A warning sign is if there's a tax barrister's opinion! If their opinion is needed, the implication is that there is a countervailing opinion that has to be argued against.

[Charlottesquare]

Just registering my very strong agreement with this statement! "Structures" and "tax schemes" usually end up being regretted, though by the client rather than by those promoting them.

Agreed, anything that needs an extra step to make a relieving provision operate/bite needs very careful thought, over the years we got offered gilt strips, SHEPs, film deals, lots of "manufactured" options; maybe I am just risk averse. (Forgot loan schemes/EBTs)

The truth is that clients don't realise how aggressive these schemes are. A warning sign is if there's a tax barrister's opinion! If their opinion is needed, the implication is that there is a countervailing opinion that has to be argued against.

The trouble with barristers is they like to argue (solicitors as well, my parents both being solicitors I never won many arguments), I have one as a fellow member of my fishing club (well an advocate), nice chap but always seems to want to win every point- with them it all seems to be a game.

[scrumpyjack]

Agreed, anything that needs an extra step to make a relieving provision operate/bite needs very careful thought, over the years we got offered gilt strips, SHEPs, film deals, lots of "manufactured" options; maybe I am just risk averse. (Forgot loan schemes/EBTs)

The truth is that clients don't realise how aggressive these schemes are. A warning sign is if there's a tax barrister's opinion! If their opinion is needed, the implication is that there is a countervailing opinion that has to be argued against.

The trouble with barristers is they like to argue (solicitors as well, my parents both being solicitors I never won many arguments), I have one as a fellow member of my fishing club (well an advocate), nice chap but always seems to want to win every point- with them it all seems to be a game.

Similarly there is a judge who is a member of our golf club, but many members weren't too keen on playing with him as he was somewhat dictatorial, being used to ordering everyone about!