Planning for Profit Extraction
David, 42 runs a successful limited company developing software in the education sector. As is the case with many company directors David pays himself by way of a mixture of salary and dividends.
To date he has drawn an income each year to make full use of his basic rate tax limit but has been reluctant to draw more due to the need for the business to retain profits for expansion and his general dislike of paying higher rate tax.
Our Client’s Needs
The business has grown to a position that David is comfortable with and has accumulated large cash reserves that may be surplus to requirements. David was concerned that the large cash holdings might have adverse tax consequences resulting in the loss of business property and entrepreneurs reliefs for capital gains tax on the eventual sale of his shareholding. The business also owns unencumbered commercial property.
CST Wealth’s Advice
We met with David to discuss various options that included increasing his dividends in tandem with some personal tax planning, making a company pension contribution and moving commercial property into a tax efficient structure. This significantly improved his tax efficiency and met his short and long term goals.
After further discussion it became apparent that David had a wish to release capital that he could use personally within the next 5 years or so that he could fund University education. We ruled out pension contributions and the business property investment as these would not provide the personal control within 5 years.
We recommended that David increased his dividends and with the proceeds invests into an Enterprise Investment Scheme (EIS). The result is that although the dividend will result in a higher rate tax liability this will be offset by the 30% tax relief obtained through the EIS investment. David will need to hold the EIS investment for at least 3 years but can then look to exit this investment and receive the capital free of tax.
David has released cash from the business in a tax efficient and non-contentious way by the use of Government approved legislation helping to preserve the tax benefits of the company structure as well as providing personal funds to assist with his children’s education.