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bigduckontax, Accountant
Category: Tax
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I have a company which has a reasonable cash flow in reserve,

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I have a company which has a reasonable cash flow in reserve, i have been advised to release some of this cash as i dont see much i can reinvest in the business. the company has 2 primary ordinary shareholders 50/50 split. both shareholders want to release cash in dividends or a new business each of us will hold independently. I was thinking whether there was a possibility of creating a new company owned 100% by myself only; whats the best tax efficient way of releasing in my primary company and pumping into the new company? some suggestions that have been made are:
* release / reduce share capital in primary company for each major shareholder e.g. reduce from 1000 shares each to 500 each, the difference is the money share capital and its been suggested I will qualify for entrepreneur's relief, in which i will pay 10% on, the rest i can then take and pump into my new company - this sounds too easy and not sure it is a viable solution. can someone advise? else, whats the best method in taking money our of primary business and pumping into new company?
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. First solution is to wait until next tax year. From April 2016 Dividend Tax Credit is to be removed and replaced by a new tax-free Dividend Allowance of £5,000 a year for all taxpayers. You will thus be able to remove capital for reinvestment without penalty. Releasing more capital and protecting the Capital Gain to 10% through Entrepreneur's relief is another possibility The relief is governed by some complex rules which you can find set out in full here: I do hope my reply has been od some assistance and shown you a possible way forward.
Customer: replied 2 years ago.

Hi Keith, thank you for your response. I want to avoiding the dividends method as a last resort due to the high taxation.

can you confirm that in reducing my shareholdings in my company which i hold 50% shares in would enable me to release capital ( to the sum I wish it to place on the share), I would then be liable for entrepreneur’s relief at 10% ( up to £10m). I pay the 10% tax then I would be entitled todo what wish with the monies? Is this a way forward? Appreciate your expertise on the matter. Hesam

From April 2016 Hesam the first 5K of dividends are not taxed at all.

I cannot advise fully on Entrepreneurs' Relief (ER) until I have more detail.

Here is the relevant Gov UK advice:

'If you’re selling all or part of your business

All the following must apply:

  • you’re a sole trader or business partner
  • you’ve owned the business for at least one year before the date you sell or close it
  • you sell or dispose of your business assets within 3 years after selling or closing the business'

If you satisfy these rules then you would be entitled to ER.

Customer: replied 2 years ago.

Hi Keith, here are some answers and a subsequent question:

* I am a business partner/director with 50% ordinary shareholdings in a Ltd company

* I have owned the company since 2010 ( 5years)

* I'm not sure what the following means "you sell or dispose of your business assets within 3 years after selling or closing the business". I want to reduce my share capital - maybe this is selling my shares back to the company? would this comply with the required statement?

I would say so providing the company is still trading.
Customer: replied 2 years ago.

company is still trading, so this method would be possible?

Yes, perfectly feaseable.
Customer: replied 2 years ago.

when writing this i was under the assumption that there are no restrictions on dilute your shares before selling / having your company buy back while still qualify for Entrepreneurs relief. E.g. If you dilute 1 ordinary share to 10,000, do you have to hold it for X number of years before selling and qualifying for Entrepreneurs relief? i do apologise if im asking too many questions here, i just want to be sure -i appreciate your advise. thanks

Providing you do not dilute below the 5% level you should be ok.

Watch out though for the ER lifetime limits [source CG63955;:

'The amount of Entrepreneurs’ Relief is subject to a ‘lifetime’ limit of gains in respect of which the relief can be given. The amount of this ‘lifetime limit’ is -

  • for disposals from 6 April 2008 to 5 April 2010 - £1 million.
  • for disposals from 6 April 2010 to 22 June 2010 - £2 million, and
  • for disposals on or after 23 June 2010 - £5 million
  • for disposals on or after 1 April 2011 - £10 million'

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