Trade personal assets for tax-free cash from your business
You need some quick cash. You could take it as extra income from your company, alternatively it could lend it to you. The trouble is this can result in tax or NI bills for you and your business. How can you extract the cash more efficiently?
Profit extraction
As an owner manager of a company, the usual methods for taking cash from it are salary, dividends or a loan. As you would expect, there are usually tax and, with the exception of dividends, NI liabilities attached to each method. However, there’s an alternative that might be open to you which has low or zero tax and NI consequences.
Selling assets to your company
While there are extensive anti-avoidance rules that prevent company owner managers extracting income from their companies, especially cash income, they don’t apply to legitimate transactions where your company pays you in exchange for goods or services (other than your services as a director or employee) that you provide to it.
Example. Anna is the owner manager of Acom Ltd. She needs £16,000 at short notice. Acom could lend her the money interest free which would result in only a small tax bill for her. However, as she doesn’t expect to repay the debt for a few years, Acom would have to pay a tax (known as a s.455 charge) of 33.75% of the amount borrowed, although the tax would be repayable nine months after the end of Acom’s accounting period in which the debt was cleared. The good news for Anna is that she owns various items of valuable jewellery. She can sell enough of these to Acom to raise the £16,000 she needs. The beauty of this arrangement for Anna is that she retains ownership of these through Acom.
Anna must ensure the jewellery is not readily accessible to her to avoid use of it counting as a benefit in kind. Nevertheless, if she’s happy to pay a modest tax charge she can still make occasional use of the jewellery.
Money you receive from assets sold to your company isn’t income if the transaction is a commercial one, i.e. you’re paid no more or less than what the asset is worth.
If Acom had other shareholders, selling assets to it would mean Anna losing part of her right to them. To mitigate this a sale agreement could include a clause giving Anna first refusal to buy back the assets if the directors decide to sell, or she could be given an option to buy as part of the original sale contract.
Out of the frying pan?
While the cash Anna receives from Acom isn’t subject to tax or NI as it would be if it were salary, it isn’t necessarily tax free, although there’s a good chance it is. Anna’s jewellery is a type of asset to which capital gains tax (CGT) may apply, but only if Anna sells the jewellery for more than it cost her. Even then various exemptions can make it tax free (seeThe next step).
Shares and other assets
The same method can be used to extract low or zero tax cost money in exchange for other assets, e.g. furniture, cars or even quoted shares. Cars and other depreciating assets are a good choice as they aren’t within the scope of CGT.
Related Topics
-
ITSA refund security checks
You’re due an income tax refund of £1,200 from your 2022/23 tax return which you filed in December 2023. Unbelievably, the refund is still held up by HMRC’s security checks. How can you speed up the repayment?
-
HMRC expands agent-related services
HMRC has written to the CIOT to confirm updates to the services provided on the Agent Dedicated Line. What’s changed?
-
Boost your family’s pension fund tax efficiently
Your spouse hasn’t paid into her pension fund since giving up work to have children. You’ve been told that you can pay contributions on her behalf. As a company owner manager, is it more tax efficient for you or your company to make the payment?