Taking money out of a Ltd Company

TCW85

Can I ask the best way of taking money out of a ltd company. 

I’m employed full time elsewhere and JUST break the higher rate tax threshold. I have a Ltd. company with a small number of rental properties within, which earn a profit each year. 

Previously I have just taken the highest tax-free dividend and a bit extra prior to me breaking the higher tax bracket; but with the dividend allowance now being such a minimal amount I wish to increase the amount I take to increase my income. 

What is the best way to do this overall..?

Kindest,

Trev. 

Bookworm105

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way to take money out in a personal name is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you, rather than the Ltd, paid in the first place 

TCW85

Bookworm105 said:

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you rather than the Ltd paid in the first place 

Thanks for the info. As I’m now the sole director/shareholder would other options be to somehow ‘close’ the company? Or somehow return the properties into my sole name to avoid paying duplicate tax on the income?  

Phoenix72

I'm assuming you took professional advice when choosing to hold the properties in a Ltd company? What is their advice on your current situation?

Bookworm105

TCW85 said:

Bookworm105 said:

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you rather than the Ltd paid in the first place 

Thanks for the info. As I’m now the sole director/shareholder would other options be to somehow ‘close’ the company? Or somehow return the properties into my sole name to avoid paying duplicate tax on the income?  

methods to return the properties to private ownership would be to 

a) the Ltd sells them to you and thus pays CT arising from the sale. Sale price would need to be at open market value to avoid the obvious opportunity to undervalue for a "connected party" transaction given it is legally defined as a "close" company

or

b) shut the company and liquidate all its assets. A member's voluntary liquidation is best done by a qualified accountant given the assets of the company appear to compromise properties that are i) illiquid and ii) hard to sell off in small fractions to take advantage of CGT and Income tax rules on such  

As it appears you do not understand the basic totality of you tax position I suggest you pay an accountant to illustrate the 2 scenarios in your position:
a) hold property in personal name, pay tax on rental profit, sell off property in personal name
or
b) buy property in name of Ltd, draw income therefrom, pay personal tax thereon. Company sells off its assets and money goes to owner

under current rules and rates it is not simply a case of "taxed twice"

DullGreyGuy

TCW85 said:

Bookworm105 said:

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you rather than the Ltd paid in the first place 

Thanks for the info. As I’m now the sole director/shareholder would other options be to somehow ‘close’ the company? Or somehow return the properties into my sole name to avoid paying duplicate tax on the income?  

But you'd still be paying income tax on the profits made by the rentals with no option to hold it in the company so if you're happy with that then just dividend the profits and at least get a small additional tax relief and dont go through the process of having to sell the properties to yourself. 

TCW85

Thanks both. To put perspective on it, family business that was a part of with limited involvement owing to working overseas. Family members have now sadly passed away leaving me to manage. I still have a good ten to fifteen years work in me yet so I will be looking at potential pension options with this my sole source of income in the future. My questions were purely for the meantime. 

Financial advisor booked in for a few week’s time. I just wanted to gain a basic understanding of my options beforehand. 

Bookworm; thank you; you’ve been most helpful 👍🏼

TCW85

DullGreyGuy said:

TCW85 said:

Bookworm105 said:

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you rather than the Ltd paid in the first place 

Thanks for the info. As I’m now the sole director/shareholder would other options be to somehow ‘close’ the company? Or somehow return the properties into my sole name to avoid paying duplicate tax on the income?  

But you'd still be paying income tax on the profits made by the rentals with no option to hold it in the company so if you're happy with that then just dividend the profits and at least get a small additional tax relief and dont go through the process of having to sell the properties to yourself. 

My thoughts being in company I’ll be paying corp tax and then income/dividend tax to take it out. If in my name I’ll be paying income tax only? But then the issue that I cannot afford to buy the properties out into my personal name..

Bookworm105

TCW85 said:

DullGreyGuy said:

TCW85 said:

Bookworm105 said:

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you rather than the Ltd paid in the first place 

Thanks for the info. As I’m now the sole director/shareholder would other options be to somehow ‘close’ the company? Or somehow return the properties into my sole name to avoid paying duplicate tax on the income?  

But you'd still be paying income tax on the profits made by the rentals with no option to hold it in the company so if you're happy with that then just dividend the profits and at least get a small additional tax relief and dont go through the process of having to sell the properties to yourself. 

My thoughts being in company I’ll be paying corp tax and then income/dividend tax to take it out. If in my name I’ll be paying income tax only? But then the issue that I cannot afford to buy the properties out into my personal name..

as I said, the balance between corporation tax, dividend tax and CGT versus income tax & CGT needs to be illustrated using actual figures for Ltd ownership v personal ownership over the total life of the ownership of the properties plus allowing for the one off tax costs arising from changing who owns what 

it is rarely tax efficient to change ownership type during the life of the asset having committed to a certain form of ownership.

TCW85

Bookworm105 said:

TCW85 said:

DullGreyGuy said:

TCW85 said:

Bookworm105 said:

there are only 3 ways to take income from your Ltd
- as (taxable) dividend;
- as (taxable) pay via a payroll; and
- as a directors loan (which may, or may not, be taxable depending on when/if it is repaid and how much is taken out)

the 4th way is as an expense claim, but that is not income as it is merely reimbursement of a valid business expense that you rather than the Ltd paid in the first place 

Thanks for the info. As I’m now the sole director/shareholder would other options be to somehow ‘close’ the company? Or somehow return the properties into my sole name to avoid paying duplicate tax on the income?  

But you'd still be paying income tax on the profits made by the rentals with no option to hold it in the company so if you're happy with that then just dividend the profits and at least get a small additional tax relief and dont go through the process of having to sell the properties to yourself. 

My thoughts being in company I’ll be paying corp tax and then income/dividend tax to take it out. If in my name I’ll be paying income tax only? But then the issue that I cannot afford to buy the properties out into my personal name..

as I said, the balance between corporation tax, dividend tax and CGT versus income tax & CGT needs to be illustrated using actual figures for Ltd ownership v personal ownership over the total life of the ownership of the properties plus allowing for the one off tax costs arising from changing who owns what 

it is rarely tax efficient to change ownership type during the life of the asset having committed to a certain form of ownership.

Thank you. Hugely appreciated. 

Grumpy_chap

Bookworm105 said:

methods to return the properties to private ownership would be to 

a) the Ltd sells them to you and thus pays CGT arising from the sale.

I am not sure that is correct.  AIUI, the Ltd Co would not be liable to CGT, but there would be a corporation tax liability arising on the profit:

1. Ltd Co has the property on the balance sheet at original purchase value at start of accounting period.
2. OP buys the property from the Ltd Co. at full market value.
3. OP pays SDLT (and the second-property surcharge will apply).
4. Property is no longer on the balance sheet.
5. The full market value of the property is on the balance sheet at end of accounting period (as cash-in-hand).
6. The Ltd Co pays corporation tax on the profit (increase in balance sheet).
7. The Ltd Co can then pay the OP dividend, subject to dividend tax.
8. Alternative to (6) and (7) would be that, before the end of the accounting period, the OP draws cash-in-hand as salary so liable to employer's and employer's NI plus income tax, but avoids corporation tax.  
9. An option to reduce the NI and IT arising is to consider pension contributions.
10. The OP could also "draw" the funds by the company purchasing an EV, so the balance sheet  is reduced (brand new EV currently gains full first year write-down) and the resulting BIK is low, currently 2%.  Assuming the OP actually wants / needs a car.

I agree with your conclusions that changing ownership once the asset is owned is rarely tax efficient and that the OP should engage the services of an Accountant as there are many interrelated variables here.

As for avoiding the higher rate tax, which seems to be the OP's objective, if the OP does not need the funds now, an option is to leave the properties and resulting income within the Ltd Co, suffer corporation tax, and then draw the funds at whatever time in the future the OP has lower income.  Possibly after stopping work and before taking pension, or to top up pension if lower than higher rate tax.

All tax rates may change at any time.