Many personal service companies come the end of their working lives. Tax planning has to be considered when dissolving the company to get the most beneficial tax rates. Legal and commercial factors also need to be considered. Find out more in this article.
Consider reinvestment within the company
Although your company may have to come to the end of its intended life, and the easy option is to dissolve it, other options need to be considered. You may consider investing your companies’ funds in another property. Extracting the proceeds from your company in this case would not trigger a tax charge.
If your existing company reinvests in other opportunities it could become a tax-efficient family investment. This encourages future inheritance planning.
Extracting the reserves
If you wish to extract monies for personal reasons the most tax efficient way would be to ‘close’ the company. Once you have paid your creditors you can extract the cash via a capital distribution. If your company has been dissolved, then capital distributions paid falls within the capital gains regime.
• If your company has reserves over £25,000 you need to be very careful to follow the correct procedures or it could be treated as an income distribution and will be subject to distribution tax rates, which are higher than CGT.
• You can formally place the company into a member’s voluntary liquidation. This will mean you incur additional winding up costs. However, the benefit is that the retained earnings and share capital will be extracted tax efficiently which should more than cover the costs.
• If you intend on reinvesting in a company of similar trade the CGT benefits will not apply. This is to avoid ‘phoenixing’ i.e. closing a company to claim Entrepreneurs’ Relief with the full intention of continuing with another company.
If you are aware of the challenges and take advice to overcome them, you can make significant tax savings.
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