If you are contemplating a dividend in advance of closing your limited company – think twice and seek advice.

Cash is king sounds a bit of a cliché but it is true. Most clients we deal with are only interested in extracting their money for personal use and are not overly concerned about the underlying accounting treatment which drives the eventual tax treatment.

Cash can be extracted as a loan. If there is then an outstanding loan at the date of the MVL then it can be distributed as capital to the shareholder(s). Usually the director(s) and shareholder(s) are one and the same so the debt is essentially extinguished on liquidation/distribution.

But what should you consider with this approach?

• Pros

As a capital distribution it means that, along with any other cash distributions, it is taxed at the flat rate of 10% if Entrepreneurs’ Relief is available as opposed to the higher rate of tax if a dividend.
It also means the money can be accelerated more and with you more quickly. This is particularly important if there is a life event to pay for. Most clients we see do not particularly like a liquidator controlling their funds and, as a liquidator, we often see significant delays with the banks actioning our instructions to transfer funds meaning the remaining company funds can languish in a business account for weeks and sometimes months earning very little interest and not accessible by anyone.
No s455 tax is due on this loan as it is extinguished.

• Cons

The loan is treated as a beneficial loan in the absence of any interest being paid on it. This is then included on the director’s individual P11D but the tax liability is relatively small.

If the company subsequently becomes insolvent, then any loan becomes payable. If there is any risk of insolvency then cash should be withdrawn as a salary otherwise it would be challenged later.

Looking ahead

We encounter a lot of clients who are not suitable for MVLs because they have consistently taken dividends even when they have breached the lower earnings limits and are paying higher rates of tax. As a result the remaining capital falls below the £25k limit and the company can just be struck off and an MVL has never crossed the mind of either the client or the adviser. If an MVL had been anticipated (and that should be the case where clients are on fixed term contracts and their company has a specified shelf life) then an early decision can be made as to whether, instead of a dividend, a loan could be accrued which would then be distributed as capital later via an MVL.

For the shareholders to potentially save some income tax and, at the same time, accelerate their cash distribution, a loan should be considered as an alternative to a dividend.

Get in touch

If you are considering your options in advance of closing down your limited company, get in touch with a member of our Restructuring for expert insight.