Director expects to be able to extract money from a company in the future by Entrepreneurs relief, either by selling shares in the company or alternatively by liquidating the business for its cash balance. The issue is the director has cash needs in the short term and the company is not ready to be either sold/closed yet.
£1m cash in post-corporation tax in the business. The two treatments of this are:
1. Paying a Dividend - tax rate 38.1% (£381,000 in tax).
2. Sale/Close - claim Entrepreneur's relief - tax rate 10% (£100,000 in tax).
Alternatively, the company lends the director ~£755k and pays (32.5%) S455 tax on this (So: £245k tax paid now).
The director pays 2.5% interest (HMRC rate) on this (~£19k) per year. As income to the company this is then taxed at about 50% (corporation tax + future dividend of the profits) - so a loss of ~£10k per year in tax. Because the director pays the HMRC rate on a fixed and invariant loan - no Benefit in Kind payment is due.
The director borrows the money for 3 years at which point he repays the loan from other sources. 9 months after the end of the corporation tax period in which the loan is repaid, the company gets back its £245k in tax that was paid.
The company is then either sold or closed and the director gets the £1m original post corporation tax balance and pays 10% entrepreneurs relief on that.
In this way, director has had access the £755k of cash for a total cost tax cost of about £30k (£10k per year) - saving £281k of tax by using entrepreneurs relief 3 years in the future instead of paying dividend tax now.
Are there any issues with this or am I missing anything?