Accessing Capital Growth.
When a company becomes established and is thriving, what is the best approach to withdrawing some of the accumulated capital? A good question and one worthy of careful consideration.
If your business is unincorporated (you are a sole-traders or in a partnership), the process is relatively straightforward. As tax will already have been paid on the accumulated profits, there are no additional tax consequences to consider. However, this is not the case for owner managers of companies, where both company and tax law must be considered.
There are three main things to consider when withdrawing capital, other than by paying a dividend.
- The balance sheet must remain positive following the withdrawal,
- The company must have enough cash or be able to raise it through borrowing,
- There will be tax consequences for the shareholders.
Accumulated capital is reflected in the value of a company’s shares and, other than selling the shares to a third party, there are a couple of ways to access the capital.
The first option is that the company can buy some of its shares from one, some or all its shareholders. If completing a company purchase of shares you should be aware that if certain conditions are not met then income tax (at up to 38.1%) is payable on the part of the proceeds over and above the original capital.
The alternative is for the company to reduce its share capital by reducing the value of each share. If choosing this option, it is important to note that all shares of the same class will be affected, and it is therefore not suitable if the intention is to pay only one of some of the shareholders. The capital distribution can be liable to capital gains tax at rates of up to only 20%.
This is a complex area, where special clearance is often required from HM Revenue & Customs. For further advice please call us on 01524 67111 and our team will be happy to help.
Author: James Cornthwaite FCA CTA
A former pupil at St Aidan’s C of E High School, James attended Blackpool Sixth Form College and Lancaster University, graduating in 2004, gaining BSc. first class honours. He joined Moore and Smalley, Preston in 2005 and qualified as a...
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