The pre-budget statement made a few weeks ago has ruffled the feathers of many a businessman with an eye to cashing in his investment in his business. Despite the Chancellor’s back tracking through the giving of a minor concession (the first £100k of gain on the sale of a business will not be taxable), the announcement encourages short termish and punishes long term investment in business, because for many it will virtually double the amount of tax they pay when they cash in their investment. Whether the Chancellor does a complete U-turn is not free of doubt, but as it is probably unlikely he will do so, so if you are contemplating selling up, you could do worse than selling up pre April 2008.
There are several ways of extracting the value from your business:
1) As a bonus. You can do this whether or not you close the company down, but it is an expensive route: you have to pay income tax and possibly NIC on your drawings.
2) As a dividend to shareholders – here you will suffer a tax bill of 25%. Again you can take this route whether or not you chose to close the company down, but like 1) it is still a rather expensive route.
3) You could take advantage of HM Revenue & Customs’ Extra Statutory Concession ESC C16 which allows a distribution to shareholders to be treated as a capital gain. But this can only be used if the company is being closed down, then dissolved. Until April 2008 two types of ‘deductions’, indexation and taper, could be available, reducing the effective rate of tax. With Taper, where you have held your shares in the company for more than 2 years, one quarter of the gain is taxable; after the annual exemption is deducted, the resultant figure is subject to CGT, at its present rate of 40%, meaning that tax is generally payable at the rate of less than 10% of the gain. So the ESC C16 route can be a very cost effective route.
But there is a problem with taking the ESC C16 route. Although the Revenue are happy to allow companies to follow it, another part of the government, the Treasury Solicitor, is not so happy. He will ask you to pay to him any distributions of share capital over £4,000!
4) By distributing assets and cash through a Members Voluntary Liquidation. All distributions in MVLs attract CGT, not income tax. And until April 2008, you will probably get Taper and Indexation, meaning that you pay about 10% in tax, making it an efficient exit route. As with ESC C16, the company must be shut down/dissolved, but unlike ESC C16, the Treasury Solicitor cannot attack any share capital distributions above £4k.
And you should always take advice from a tax expert before you do anything, the devil is in the detail! And if you have held the shares for above two years, massively so if you held them before March 2002, take advice now, do not delay as you have much to lose after March 2008!