Often, when business owners are looking to cease trading, a question arises as to how the value of the company assets may be extracted. Whilst a members voluntary liquidation is often proposed as the way, this comes with additional costs. A useful fact is that if the distributable assets are less than £25,000 then a capital treatment can apply to the distribution and Entrepreneur’s Relief received, meaning that the funds are extracted at a beneficial rate. However, if assets exceed £25,000 any extraction will be treated as a distribution and taxed at the owner’s marginal rate. In many cases, the capital treatment is likely to be the preferred route and dependent upon the level of assets at the point of cessation, it maybe possible to reduce the assets to the qualifying level by considering a termination payment to directors. Termination payments are free of tax or national insurance up to £30,000, except when they relate to a payment in lieu of the notice period.
The £30,000 exemption applies not only to statutory redundancy payments but also to amounts paid by the company in respect of the direct termination of employment contracts including directors service contracts. Therefore, if the level of the company’s assets at cessation is £55,000 or less, the owner/director has an option to extract that cash partly tax-free and partly at 10%. Of course, a formal service contract must exist and the £30,000 must be a reasonable compensation for the loss of salary and benefits the director has been receiving.
Should you have any questions regarding any of the above please get in touch with your local Haines Watts office or representative.
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