Looking at future uncertainty and perhaps significant losses going forward, some business owners, who may already have been contemplating retirement, could consider accelerating those plans. Against the Covid-19 backdrop, the energy to fight another ‘recession’ might be one too many. But what are some of the consequences to consider?
- If the company simply ceases to trade, there may be costs to consider such as redundancy payments or lease costs, for example.
- A distressed sale of the business might protect jobs and the trade going forward but for the retiree it could result in little value in their pocket.
- On top of that, if the trading company has reserves in excess of £25,000 and the owner manager simply winds up the company and extracts the reserves, they could, if they are a higher rate taxpayer, end up with a tax charge of up to 38.1%.
- If the expectant retiree believes that, over the next few years, they will become a basic rate taxpayer, they could consider taking the reserves out of the company over several tax years and, therefore, may only be taxed at 7.5%.
- It may, however, be preferential to go down the more formal member’s voluntary liquidation route to extract the reserves. This could result in the tax liability being only 10%. Taking up this option, one has to balance the potential tax saving against the additional legal costs involved.
- Before winding up the company or extracting the reserves, one should ask the question as to what the retiree is intending to do with the money which is being taken out of the company. If it is for investment purposes, for example, to acquire a buy to let property, then is it worth considering not taking the cash out of the business but turning it into to an investment company, thereby avoiding the tax hit on extracting the reserves on the way out, leaving the retiree with more money to invest?
There are many issues to consider when looking at going down the retirement route for the owner manager, we have only touched upon a few. It is preferable to plan well in advance so all the issues and opportunities are explored, tax or otherwise, to ensure, as best you can, the retirement you hoped for. Please do not hesitate to contact us if you would like to go through those options based upon your personal circumstances.