CGT38 Extracting Profits from a Company Flashcards
If a company makes a profit it can do one of three things:
- reward the directors and employees by means of remuneration; or
- distribute profits to their shareholders by dividend; or
- accumulate the profits within the company.
Remuneration summary
Cash remuneration is liable to income tax and Class 1 NICs. PAYE must be deducted. The company is also liable for secondary NICs.
Employees suffer tax on cash remuneration at effective rates of 33.25%, 43.25% or 48.25% (rates differ for Scottish taxpayers). There is an NICs saving if remuneration can be paid in non-cash benefits.
Extraction by dividend
Companies distribute profits to shareholders by way of dividends. Dividends are chargeable to income tax but are not subject to NICs.
There are currently four rates of tax on dividend income:
Dividends within the dividend allowance (£2,000) 0%
Dividends within the basic rate band 8.75%
Dividends within the higher rate band 33.75%
Dividends above the higher rate band 39.35%
This generally makes extraction by dividends cheaper than by remuneration.
Extraction by dividends also saves 15.05% secondary NICs.
In director-controlled companies, it is common for….
the shareholder/director to take a salary equal to the primary earnings threshold for NICs and then ‘top up’ by dividends.
A dividend in specie is generally taxed on the recipient in the same way as a cash dividend. It may give rise to a capital gain on the company.
Other Extraction Routes
If an individual owns a property which the company uses in its trade, rent could be charged to the company.
However, this extraction route limits the amount of gains which will qualify for business asset disposal relief on a sale of the property.
If a director/shareholder has lent money to the company, interest could be charged. The interest is chargeable to income tax but not NICs.
There are two ways in which cash can be taken out of a company and be treated as capital proceeds for CGT:
- On a ‘company purchase of own shares’.
- Where a distribution is made to a shareholder on a winding up
A capital extraction is generally cheaper than taking dividends as CGT rates are lower (10% or 20%), and taxpayers have an annual exempt amount for CGT which is often wasted.
Company purchase of own shares summary
On a company purchase of own shares, capital treatment will only apply if the buy-back is by an unquoted trading company and the repurchase is made either:
* to benefit the trade; or
* to discharge an IHT liability as a result of death.
Where the individual is seeking capital treatment under the ‘benefit of trade’ route, there are several other conditions which must be satisfied. These can be found at CTA 2010,
ss.1033–1042
Winding up: Distributions made by companies to their shareholders in the course of a winding up are generally…..
treated as capital distributions and are liable to CGT.
Winding up: Where a winding up is presided over by a liquidator…..
distributions to shareholders are capital distributions.
However, there are additional costs of using a professional insolvency practitioner.
Winding up: The resulting capital gain will qualify for business asset disposal relief provided that…
for at least the 24 months ending with the cessation of trade:
* the company was the individual’s personal trading company; and
* the individual had been an employee of the company.
In addition, the shares must be disposed of within three years from the date the trade ceased.
Winding up: Alternatively, the company can be ‘struck off’ under the dissolution procedure in the Companies Act 2006….
This avoids the costs of using a qualified insolvency practitioner. However, where a company is wound up using the Companies Act 2006 dissolution procedure, CTA 2010, s.1030A applies.
