Limited Company, spread out dividends

optoutDB

I've just had a realisation !! and want to check that I'm not overlooking something.

I'm 56, gave up salaried work at 40. Lived frugally for 15 years, self-employed and not earning much, self-assessment tax returns. Have recently done projections and realised that I have enough expected wealth that I need to start spending (No-one needy to leave anything to).

I have a new business idea that I'm going for next year.  It could result in 2 companies with combined £90k profit.

The idea/realisation is that I can pay myself dividends as and when it is tax efficient. Especially to stay under the higher rate threshold. eg if the business has post tax profits of £70k for 5 years, I can choose to pay this out at £35k a year for 10years.

And also this means I can take my DB pension early like I want to (£66k tax free lump, then £10k pa). The lump sum will go in to the business so I don't need to sell any assets. 

This is probably obvious to ltd company owners, but it's new and exciting to me.

Any comments?

tacpot12

Do the businesses need all (or any) of the £66k lump sum? Normally businesses run better if the owners are disciplined enough to grow them from the profits they can make from day 1, rather than borrowing money. You aren't borrowing the money to put into the business, but you are missing out on the passive income you would get from investing it. 

I think it's great that you have the confidence to start a business, but I would use your entreprenurial mind to test whether you really need to invest the lump sum, or can you test the idea out and start making a profit early on.

Another idea is to consider finding a partner that could put in a similar amount of money. It's rare that one person can bring all the skills needed to launch a new business, so a partner that complements your own skills, might also de-risk the new venture - if they halve the amount of capital you need to sink into the business so much the better.

Marcon

optoutDB said:

I've just had a realisation !! and want to check that I'm not overlooking something.

I'm 56, gave up salaried work at 40. Lived frugally for 15 years, self-employed and not earning much, self-assessment tax returns. Have recently done projections and realised that I have enough expected wealth that I need to start spending (No-one needy to leave anything to).

I have a new business idea that I'm going for next year.  It could result in 2 companies with combined £90k profit.

Without giving away any details you'd prefer to keep to yourself, is there a solid business/finance reason to have two companies rather than one?

optoutDB said:

The idea/realisation is that I can pay myself dividends as and when it is tax efficient. Especially to stay under the higher rate threshold. eg if the business has post tax profits of £70k for 5 years, I can choose to pay this out at £35k a year for 10years.

And also this means I can take my DB pension early like I want to (£66k tax free lump, then £10k pa). The lump sum will go in to the business so I don't need to sell any assets. 

What will you live on if the business fails? It's a question anyone starting a business, especially with a large chunk of their retirement income, needs to consider.

optoutDB said:

This is probably obvious to ltd company owners, but it's new and exciting to me.

Any comments?

There seem to a few considerations you may not have thought through (yet), but much will depend on what your business is going to be doing and when. Without wishing to dampen your enthusiasm (and here's hoping your new venture will be a huge success), perhaps some advice from an accountant, not least to talk through your ideas, would be a particularly good thing to do next. 

optoutDB

tacpot12 said:

Do the businesses need all (or any) of the £66k lump sum? Normally businesses run better if the owners are disciplined enough to grow them from the profits they can make from day 1, rather than borrowing money. You aren't borrowing the money to put into the business, but you are missing out on the passive income you would get from investing it. 

I think it's great that you have the confidence to start a business, but I would use your entreprenurial mind to test whether you really need to invest the lump sum, or can you test the idea out and start making a profit early on.

Another idea is to consider finding a partner that could put in a similar amount of money. It's rare that one person can bring all the skills needed to launch a new business, so a partner that complements your own skills, might also de-risk the new venture - if they halve the amount of capital you need to sink into the business so much the better.

I like your advice in general for someone talking about investing their pension in a business venture.

But it doesn't quite apply to me. I've plenty to live on already (on a probability basis). I don't need the 66k and it's not at risk anyway: worst case scenario is zero turnover and the 60k assets depreciate 10%.  I don't need the business to succeed, this is very much a lifestyle business, that could take me to next level retirement (people are paying me to do what I want to be doing anyway).

For the last 15 years my hobbies have been my income. This makes it hard for me to get into a hobby that costs me money. This is actually where the business idea came from, I started a new hobby and it cost me £6k over 2 years, and even though I'm supposed to be spending £25k pa on hobbies so it's a massive underspend, it still went against the grain so I decided to make the new hobby into a profitable business.

optoutDB

Marcon said:

Without giving away any details you'd prefer to keep to yourself, is there a solid business/finance reason to have two companies rather than one?

What will you live on if the business fails? It's a question anyone starting a business, especially with a large chunk of their retirement income, needs to consider.

There seem to a few considerations you may not have thought through (yet), but much will depend on what your business is going to be doing and when. Without wishing to dampen your enthusiasm (and here's hoping your new venture will be a huge success), perhaps some advice from an accountant, not least to talk through your ideas, would be a particularly good thing to do next. 

1. Two businesses just under the VAT turnover threshold are much more profitable than 1 company with £180k turnover (on a very high margin business).

2. The £60k investment is in assets, worst case scenario is no income 10% depreciation of assets.  I have enough to live on already, the business is a lifestyle venture.

3. Prefer to do everything myself, with free advice form forums    When I get over £150k turnover I may call in an accountant. 

Grumpy_chap

optoutDB said:

1. Two businesses just under the VAT turnover threshold are much more profitable than 1 company with £180k turnover (on a very high margin business).

2. The £60k investment is in assets, worst case scenario is no income 10% depreciation of assets.  I have enough to live on already, the business is a lifestyle venture.

3. Prefer to do everything myself, with free advice form forums    When I get over £150k turnover I may call in an accountant. 

1.  Not necessarily.  If the two businesses are "connected businesses" which they would appear to be from the content of the thread, the turnover is aggregated for the purposes of determining liability for VAT-registration.
https://www.thp.co.uk/running-two-businesses-for-vat/

2.  If business 1 has acquired these £60k assets in order to operate, how will business 2 use the equipment?  It will need business 2 to make a hire payment at appropriate market rate to business 1.  The turnover of business 1 will increase as it now includes the work that is being sold plus the hire of equipment to business 2.  It would be negligent of the Directors for business 1 to allow business 2 to use the capital equipment owned by the business without securing income for that cross-hire.

3.  You may prefer to do that, but an Accountant will probably save you money overall and ensure that you stay on the correct side of the law with regard to business structure, taxation, insurances and such like.  Will your retirement be as enjoyable if you are fighting off tax investigations with all the stress and consequences that would bring?

noitsnotme

optoutDB said:

Marcon said:

Without giving away any details you'd prefer to keep to yourself, is there a solid business/finance reason to have two companies rather than one?

What will you live on if the business fails? It's a question anyone starting a business, especially with a large chunk of their retirement income, needs to consider.

There seem to a few considerations you may not have thought through (yet), but much will depend on what your business is going to be doing and when. Without wishing to dampen your enthusiasm (and here's hoping your new venture will be a huge success), perhaps some advice from an accountant, not least to talk through your ideas, would be a particularly good thing to do next. 

1. Two businesses just under the VAT turnover threshold are much more profitable than 1 company with £180k turnover (on a very high margin business).

That sounds like a very bad idea.  Look up “artificial separation” or “disaggregation”.  It’s the quickest way to have HMRC investigating you which you really don’t want.

Tucosalamanca

As above, accounting advice is recommended.

Unless the two businesses are clearly different with no overlap, you risk HMRC inquiries.

An accountant can advise on capital allowances, most efficient ways to add money to the business and how to take it out again, among many other things.
Don't underestimate their value, or how much they can add to your profitability...

Marcon

optoutDB said:

Marcon said:

Without giving away any details you'd prefer to keep to yourself, is there a solid business/finance reason to have two companies rather than one?

What will you live on if the business fails? It's a question anyone starting a business, especially with a large chunk of their retirement income, needs to consider.

There seem to a few considerations you may not have thought through (yet), but much will depend on what your business is going to be doing and when. Without wishing to dampen your enthusiasm (and here's hoping your new venture will be a huge success), perhaps some advice from an accountant, not least to talk through your ideas, would be a particularly good thing to do next. 

1. Two businesses just under the VAT turnover threshold are much more profitable than 1 company with £180k turnover (on a very high margin business).

2. The £60k investment is in assets, worst case scenario is no income 10% depreciation of assets.  I have enough to live on already, the business is a lifestyle venture.

3. Prefer to do everything myself, with free advice form forums    When I get over £150k turnover I may call in an accountant. 

1. Unlikely to work, or everyone would be doing that!
3. Could be the worst bit of 'money saving' you ever do... Calling in an accountant at a later date, and finding out what's gone wrong/could have been done much more efficiently (at least in tax terms) isn't usually a great idea.

optoutDB

Thanks for the concerns, but the split is a very natural one so it's equally valid for them to be 2 companies or 1. 

The businesses will be clearly distinct from the start and won't do any of the things that HMRC can latch onto. The only commonalities will be me as a Director, and a big proportion of the customers.

If you look at the case law, HMRC only ever win against the really lowest hanging fruit (eg Mum's plastering company, and Son's plastering company, where there is only one plasterer and only one printer printing the invoices).  The link above even shows a dodgy looking case where they actually split an existing company as the turnover approached the VAT limit, and they got away with it. 

The thread was about dividend payments, so worth mentioning that taking all the money out via dividends avoids the potential problem of the two companies employing the same person (me)..

For the sake of discussion, I've thought of an example which is very similar in concept to my plan   Company 1 sells guided mountaineering holidays, company 2 hires out mountaineering equipment.

BlackKnightMonty

optoutDB said:

I've just had a realisation !! and want to check that I'm not overlooking something.

I'm 56, gave up salaried work at 40. Lived frugally for 15 years, self-employed and not earning much, self-assessment tax returns. Have recently done projections and realised that I have enough expected wealth that I need to start spending (No-one needy to leave anything to).

I have a new business idea that I'm going for next year.  It could result in 2 companies with combined £90k profit.

The idea/realisation is that I can pay myself dividends as and when it is tax efficient. Especially to stay under the higher rate threshold. eg if the business has post tax profits of £70k for 5 years, I can choose to pay this out at £35k a year for 10years.

And also this means I can take my DB pension early like I want to (£66k tax free lump, then £10k pa). The lump sum will go in to the business so I don't need to sell any assets. 

This is probably obvious to ltd company owners, but it's new and exciting to me.

Any comments?

Just remember the faff of being a Ltd company director.

Annual accounts (which will switch to quarterly through the ‘make tax digital’, quarterly VAT returns, business banking which charges for everything, business insurance, etc etc.

It’s a huge amount of never ending cost and admin.