If you’re planning to sell or close your business, there are opportunities to extract cash from it at low tax rates. This usually involves payments you receive for your company being subject to capital gains rather than income tax, but what else should you be considering?
Closing a company
In 2016 various anti-avoidance rules were introduced to prevent director shareholders from gaining a tax advantage by retaining profits in their companies and winding them up so that the accumulated profits were charged to capital gains at the entrepreneurs’ relief (ER) rate of 10%. While this is still possible the rules will cancel any tax advantage if you are involved in a similar business, on your own or with others, within the two years following the winding up.
Lower income tax alternative
One possible way to mitigate higher taxes resulting from the 2016 rules is not to sell or wind up your company, but instead sell its assets and retain the proceeds in the company. This cash can then be drawn gradually during your retirement when it’s likely that your income will fall in lower income tax rate bands. Of course, it’s possible that the government will anticipate this ploy and add extra measures to its anti-avoidance rules to block this type of arrangement.
Long-term planning
Another way of reducing the tax bill when you sell your company is to make use of the tax and NI-free allowance which applies to employment termination payments. The rules for these were only overhauled with effect from 2018 (for tax) and April 2020 (for NI) so aren’t likely to be subject to more changes any time soon. The revamped rules allow tax and NI-free employment termination payments, e.g. for redundancy, of up to £30,000.
Redundant directors
Redundancy might not seem an obvious tax-saving arrangement, but if you sell or wind up your company and don’t work for a successor business, you can make use of the tax and NI-free allowance mentioned above. However, you might need to take steps now to build up the right to a termination payment, especially as a director’s rights are less clear than for other employees.
Tip. The ER anti-avoidance rules do not apply to termination of employment payments meaning that any tax saving you obtain from them is safe even if you get involved in a similar business within two years following the winding up of your old company.
Directors’ right to redundancy pay
An employee’s statutory redundancy payment depends on how much they earn and the length of time they’ve worked for the employer. To qualify for similar treatment a director must have a contract of employment with their company and be paid a salary. Often directors don’t have a contract of employment because it allows them to avoid the national minimum/living wage and pensions auto-enrolment rules.
Tip. Don’t rely on the statutory redundancy rules; make provision for a contractual payment. Include a clause in your director’s service agreement (employment contract) which links the amount payable to your overall income, salary, benefits and dividends.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.