Taking Dividends to clear Directors Loan balance - My Accountant can’t explain his reasoning for this, can you?

[Radge70]

I have (what seems to be) a very good and knowledgeable accountant, however he’s not the best at explaining stuff, which is always a problem for me when it comes to committing to something that he suggests!

The situation is that I have a Ltd company that hasn’t traded for 3 years but I have a Directors loan balance of £80,000. I am very keen to close this company as the associated admin work is a burden.

Someone had suggested the MVL route but my accountant persuaded me out of that, saying that it’s risky. Instead he came up with an idea that I take £80,000 of dividends over 2 accounting periods (18-19 and 19-20). He already knows that in 18-19 I intend to take £22,000 of dividends and that the reason for that is that I will be making £23,000 in salary so the overall total of £45,000 will keep me below the higher rate tax threshold. His suggestion is to take a further £18,000 worth of dividends in 18-19 (so a total of £40,000) and then £40,000 of dividends in 19-20.

The accountant has explained that the alternative route would be just to close the company and pay 32.5% tax on the full loan balance of £80,000 (or the £58,000 it would be once I’ve taken the dividends I was going to take anyway (the £22,000) as they would be off-set against the directors loan balance).
The bit that I can’t understand is how taking the additional dividends over the 2 years is a better way to do it. He insists that it will “save me a lot of money” but from what I can see, I would be paying 32.5% tax on the extra dividends that amount to £58,000 compared to paying 32.5% tax on the directors loans when I close the company, by which time will be on the same £58,000. Would that not be exactly the same tax? Further, I currently qualify for child benefit, however if I took the extra dividends that would push my income over the £50,000 threshold for that.

My feeling is that the accountant maybe thinks I’m “saving money” by being able to take £22,000 of the overall amount at the lower dividend rate but I was always going to do that anyway, which in turn will reduce the loan balance by the same amount. Am I missing the point completely or is the accountant clinging on to the notion that he has come up with something clever but maybe realised later that it’s not saving me anything?

[robbob]

I guess there is a communication breakdown between you and your accountant - i think you need to email him your projected other income details by tax year for ye 5/4/2019 - 5/4/2020 and 5/4/2021 and possibly 5/4/2022 - so it is in black and white what can be taken before higher rate tax applies as that is where the savings is to be had. Making it clear if any of this income is planned dividends from that pot.

I would take my advise with regard to whether liquidation is the best route from a firm who carries out the liquidations - they are probably bess placed to offer the specific advise in that regard.

[UK Contractor Accountant]

The situation is that I have a Ltd company that hasn’t traded for 3 years but I have a Directors loan balance of £80,000. I am very keen to close this company as the associated admin work is a burden.

If you had a DLA for 3 years you should have already paid 32.50% S455 holding tax to HMRC anyway!

[UK Contractor Accountant]

You should be looking at a distribution in specie via a Members Voluntary Liquidation (MVl). If your company has an overdrawn director’s loan account (DLA) it is often distributed as an asset of the company even if it is not being paid back prior to the MVL. This is because the DLA is an asset of the company, which will be distributed amongst the shareholders as part of the MVL; if the director who owes the DLA to the company is also the shareholder who will receive the DLA when it is distributed as an asset, then they are essentially paying themselves back. However, it is not for simplicities sake that overdrawn DLAs are distributed in specie, more importantly for the shareholders, massive tax savings can be made by employing this method. This is because this is currently classed as capital and not income, allowing a lower rate of tax to be applied.

However, HMRC has announced plans to change the rules surrounding overdrawn director’s loan accounts and distributions in specie. This would allow HMRC to tax these distributions as income as opposed to their current tax status as capital. This has obvious benefits for HMRC; as tax could be levied at a dividend rate of up to 38.1% instead of the current 10% (with entrepreneurs’ relief), or 20% capital gains tax.