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Peter Rayney FCA CTA (Fellow) TEP of Peter Rayney Tax Consulting Ltd outlines methods of extracting funds or value from the family or owner-managed company.

Extracting Funds from Your Company

It is possible to extract funds or value from the company in a number of ways, although (a) to (c) below are usually available only for those shareholders who work in the company as a director or employee. The most important methods of extracting value are listed below:

1. directors’ remuneration or bonuses and paying salaries to other family members;
2. provision of benefits in kind and company shares;
3. pension contributions;
4. dividends;
5. charging rent on personally owned property which is used in the company’s trade;
6. selling assets to the company for value;
7. charging interest on loans to the company;
8. loans or advances from the company;
9. purchase of own shares; and
10. liquidation of the company.

The overall tax cost of the various methods of extraction will vary and it is important to determine the tax efficiency for each method of extracting funds/value.

On an ongoing basis, the working shareholders may well, in addition to drawing a normal salary, decide whether to extract surplus profits by means of a bonus or dividend.

In addition, owner-managers will often ensure that adequate provision is made for their future pension and that tax efficacious benefits in kind are provided.

Owner-managers may also consider extracting funds on loan account, but this too involves a tax cost.

Capital Receipts versus Income Receipts

A purchase of the company’s own shares, liquidation or sale of a company tend to be the most common ‘exit-routes’ for the shareholder when they wish to leave the company, retire or realise capital value.

In the context of a purchase by the company of its own shares, it is usually possible to structure the transaction either as a capital gains receipt within CTA 2010 s 1033 (ICTA 1988 s 219), or as a distribution. Similarly, if the company is about to be wound up, value can be extracted by means of an income dividend if the amount is paid prior to liquidation. Any amount distributed during the winding up would be a capital distribution (liable to CGT) for the shareholder. On the sale of the company, it may be possible to substitute dividend income for sale proceeds by means of a pre-sale dividend.

The above is adapted from Tax Planning for Family and Owner-Managed Companies published by Bloomsbury Professional.