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Sam
Sam, Accountant
Category: Tax
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I need some quick tax advice regarding the best most

Resolved Question:

Hello, I need some quick tax advice regarding the best most tax efficient way to structure a financial settlement in a business dispute.
I have the options to settle the dispute in 3 different ways:
I can sell my 50 percent share holding back to the company.
I can take a nominal dividend.
I can take a compensation payment for loss of earnings on a contract that was breached.
or a mixed payment using some or all of the above.
My question is which option is likely to be the most efficient. The sum involved is approximately £40,000.
Submitted: 9 months ago.
Category: Tax
Expert:  Sam replied 9 months ago.
Hi Thanks for your question May I ask what dispute has arisen - and whether you are an employee or a director or partner?Im assuming from the information you provide you are a half share director in a limited company - and also a paid director - but I do need to fully establish. Do you have an employment contract and if so what information does this provide on such an occasion arising? And what exactly has been breached ? May I also ask - your earnings from a normal salary/dividends and will this continue from this business Do you make pension contributions - if so how much will you contribute this tax year and what is your normal annual salaryYour overall projected income for 2016/2017 I can then advsie further Thanks Sam
Customer: replied 9 months ago.
Hello Sam, The situation has arisen as a result of me being excluded from a limited company that I co-founded by the company Directors. I am not a Director in the company having resigned my Directorship in July 2010, but, I do still hold 50 percent of the shares in the company from incorporation. The contract I referred to was a verbal agreement between me and my business partners that I would have first refusal of all work carried out by the company on a freelance basis. We have been through legal arguments and formal mediation and are now at the stage of me being paid the remainder of funds still in the company and the company being closed and wound up. I have had no significant income since being excluded from the company in March 2012 and at present my likely earnings for 2016/17 are nothing other than this proposed settlement of around £40,000. I do not make pension contributions. It is a complex situation, I hope this information helps. Best regards Paul
Expert:  Sam replied 9 months ago.
Hi Paul Thanks for your response and the additional information- and this is made very complicated by the fact there was only a verbal agreement so this cannot be treated as compensation (allowing 30K of it to be tax free) So we have Scenario 1) I can sell my 50 percent share holding back to the company. as you are only a shareholder you will not be due entrepreneurs relief so you have a capital gain position - so assuming its £40,000 then the first £11,100 will be tax free (as this is the annual exemption allowance for 2016/2017) leaving £28900 liable to 18% tax = £5202 tax due leaving you with £34798Scenerio 2) I can take a nominal dividend. - if £40,000 then the company would have to retain 10% tax credit - (so £4000) and you would not have any further income tax liability as you would remin a basic rate taxpayer as no other income - so you are left with £36,000 Scenerio 3) I can take a compensation payment for loss of earnings on a contract that was breached.- this may not be accepted by HMRC as you have no evidence (in writing) that this is breach of contract thereby allowing the first £30,000 be to paid tax free leaving just £10K liable to 20% tax = £2000 which would give you £38,000 If this was not established then you would have £40,000 less personal allowances £10,600 = £29400 x 20% = £5880 leaving you with £34120 So to end up with the maximum - you would want to plump for scenario 3 If there (even through the talks etc) evidence enough to establish breach of contract - if not then this is clearly the higher loss however one would assume you would be giving your shares back to the company so HMRC may insist that this is to be treated as sale of shares anyway - Much really is dependent on what the end position will be (retain shares or not) and within that what you want to achieve as the tax due on each scenario is really negligible. Let me know if I can assist further, but if you have all you need, then please do take the time to rate me for the level of service I have provided (or click accept) Thanks Sam
Customer: replied 9 months ago.
Sam, I am afraid I have to go out for a couple hours for an appointment, should you need more information I will be back at 4.15 pm. I hope this is ok ?
Expert:  Sam replied 9 months ago.
Hi I have replied fully to you - so it may be that you might need furtehr infromation from me Let me know if any issue - I shall be here when you return later ThanksSam
Sam, Accountant
Category: Tax
Satisfied Customers: 13707
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
Sam and other Tax Specialists are ready to help you
Customer: replied 9 months ago.
Thank you very much Sam, that is exactly the information I needed to help me make an informed decision. Brilliant service. Thank you.Best Regards
Paul.

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