Jennifer Adams looks at the cost-effective withdrawal of monies from a company on closure.
Getting through the pandemic has been difficult for all, but it will mean closure of businesses for many. Closure may not be because there is no money in the bank account and no more clients on the horizon; some may have just decided to call it a day. Such companies may have accumulated monies or assets that need to be distributed to shareholders on cessation (after all creditors' liabilities have been settled).
The question is - how can that money be withdrawn from the business tax efficiently?
‘Striking off’ the company
Should the company be solvent, and an application is made to 'strike off' the company, then depending upon the amount needing to be withdrawn, the method will be one or a combination of three ways - salary, dividend or capital distribution. The 'optimum salary' amount (currently £9,568) will probably have already been taken, and to ensure that no further National Insurance contributions is payable, the dividend or capital route needs to be considered, if possible.
A solvent company is usually closed via 'strike off', which is not a formal winding-up procedure. Any distribution of surplus assets (including the repayment of its share capital represented by those assets) is legally an income distribution. However, as a concession, treatment of a distribution can be as capital where the company's total assets are less than £25,000. Such a distribution is subject to capital gains tax (CGT), taxed at either 10% or 20% for 2021/22 depending upon the level of the shareholder's income but after deducting the annual allowance and offset of any capital losses.
If a company has applied to be ‘struck off’ but within two years of making a distribution, the company has still not been dissolved, or has failed to collect all its debts or pay all its creditors, then the distribution is automatically treated as a dividend.
The £25,000 threshold
Unfortunately, if a company holds assets worth more than £25,000, the total is treated as income rather than just the amount over the threshold. Where this is the case, the distribution is treated as a dividend with no reliefs being available, which could make the extraction of the final shareholders’ funds expensive, depending on the shareholders' personal tax situation. If dividends have already been taken to the basic rate amount of 7.5%, the payment will be taxed at the higher dividend rates of 32.5% if a higher rate taxpayer, or 38.5% if an additional rate taxpayer.
If distribution as capital is required or the distribution amount exceeds £25,000, the company will effectively be forced to incur additional costs of a formal liquidation (usually approximately £3,000-£4,000 for a small company in straightforward circumstances). Business asset disposal relief (BADR) may be available if the relevant conditions are satisfied. BADR reduces the rate of CGT to 10% rather than 20%, where the shareholder’s income, together with the gain, means the marginal tax rates are at the higher or additional rate.
In addition, capital distribution payments can attract the individual’s CGT annual exemption for more than one tax year if timed right. For example, a liquidator usually distributes 75% of the available amount as soon as funds are received. The balance is retained in case the money is needed, being payable only after HMRC clearance has been obtained and the period for any creditors to object has passed. So, if payment is made in (say) March, the balance can be paid after the fiscal year end, and separate payments can be taxed in separate tax years.
Practical tip
Should the asset value only slightly exceed £25,000, it may be beneficial for a dividend to be paid to bring the value under this amount as the additional personal tax payable may be less than the fee charged by a liquidator. However, as ever with tax, calculations are required to work out the most tax-efficient method of payment.
