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bigduckontax, Accountant
Category: Tax
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We have a family property investment company which is a limited

Customer Question

We have a family property investment company which is a limited company. We have recently exchanged on the sale of all the assets to complete next January. What would be the most tax efficient way of distributing profits to the shareholders?
Submitted: 4 years ago.
Category: Tax
Expert:  bigduckontax replied 4 years ago.
Hello, I'm Keith and happy to help you with your question. I am delighted to be able to give a flippant answer; as long as the proverbial piece of string!

It all depends upon the individual's tax position, not to mention the company's. All shareholders must be treated the same way, but see below, you can and must pay off loans first to avoid creating a fraudulent preference, a criminal offence, ouch! You cant pay dividends to half and fees to the others, but you can of course settle debts. So how to go about it? You could make a dividend distribution, however, as far as the company is concerned dividends are not a charge against Corporation Tax (CT), and the company, unless it makes losses elsewhere or has brought forward tax losses, will be liable to CT at 20% on the capital gain from the flat sale which forms part of the profit and loss account. If there are loans outstanding to shareholders these could be paid off using the profits. This is tax free in the shareholder's hands, but again doesn't help the CT position. Another way will be to pay fees to shareholders, but if any are directors, who are employees per se, they must be paid through PAYE with Income Tax and NI deducted. Such a distribution would be allowable against the company's profits for CT as would the employer's element of NI. You could, of course, put the company into voluntary liquidation, but that could involve all shareholders in very substantial liabilities and should not be considered without consulting an independent financial adviser. In most distributions the individual shareholders will be liable to income tax, at what level depends upon individual circumstances.

I do hope I have been able to throw some light into this relatively complex area. All in all it's a bit of a balancing act and if the company's affairs are complex it may be adviseable to consult a local, trusted accountant.
Expert:  bigduckontax replied 4 years ago.
Just to add this happens tax wise in a Voluntary Liquidation:

The taxation treatment depends on the amount received from the liquidators. Under 25K it comes under the CGT regime. Over 25K the whole sum is treated as a dividend, even the first 25K. It's an all or nothing situation. If you were an original investor you might be entitled to Entrepreneur's Relief which would reduce the CGT to a lower 10% rate. If you have gone over the 25K level then this will not apply. For tax purposes CGT and Income Tax apply as at the date of receipt, but rest assured that HMRC will extract the most tax from the situation as they can, especially if the 25K limit is breached.

I have extracted this from a question I answered earlier for another customer.