If you are in need of cash quickly, you could have your company lend it to you or pay you as extra income. The downside of this could be that it results in national insurance (NI) or tax bills for you and your business. But there are ways to extract the cash in a more efficient manner.
The usual methods for an owner manager to extracts cash from a company are salary, dividends or a loan. With every method there are tax implications and dividends aside, NI liabilities too.
There is potentially an alternative option available to you with minimal or no tax and NI consequences.
While there are vast and strict anti-avoidance rules that prevent owner managers extracting income and especially cash income, from their companies, these rules do not apply to legitimate transactions where your company pays you in exchange for services or goods that you provide to the company, (with the exception of your services as a director or employee).
For example, Jim is the owner manager of Enum Ltd. He is in need of £20,000 as soon as possible. Enum could arrange to lend the money to Jim interest-free, resulting in a small tax bill for him. With Jim not expecting to repay the debt until a couple years’ time, this leads to Enum being required to pay a s.455 tax charge equal to 33.75% of the total amount borrowed. In this scenario however, the tax would be repayable nine months after the end of Enum’s accounting period in which the debt is cleared. Luckily for Jim, he owns a large quantity of valuable antiques. He can sell an amount from his collection to Enum that covers the value of the £20,000 borrowed. In this arrangement, Jim retains ownership of the antiques through Enum.
It is imperative that the antiques are not readily available to Jim so that the transaction doesn’t qualify as a benefit in kind. However, if he pays a minor tax charge, he can still make infrequent use of them. But if there are multiple shareholders at Enum, once the assets are sold to them, Jim no longer has the full rights to them. This situation can be allayed if a sale agreement is in place that features a clause allowing Jim the first refusal to buy back the antiques if the directors choose to sell, or he could insert an option to buy in the original sale contract.
Any money you receive from assets you sell to your company will not qualify as income providing the transaction is a commercial one and you are not paid anything more or less than what the asset is truly worth.
Unlike with a salary, the money Jim has received in this deal is not subject to tax or NI, but that does not necessarily mean it is tax free, although there is a strong chance it is. Capital Gains Tax (CGT) may be applicable to the antiques, but only in the scenario that Jim has sold them for more than they originally cost him to purchase. With this situation however, there are various other exemptions that could result in making it tax free.
This method can be used for numerous assets being exchanged to extract low or zero tax cost money, such as jewellery, furniture, cars, or even quoted shares. If it is a depreciating asset, such as cars or machinery, then they won’t be in the threshold for CGT.
To discuss how you can trade personal assets for tax-free cash from your business, please contact SFB on 03333 444 171 or enquiries@sfb.group.
