When you are running a successful company and you have surplus cash what do you do with it? Take it out of the company to pay the mortgage? Put it in an interest deposit account and pay tax on the interest? There may be better options.
If you are running a company (and if it is your only source of income), for every pound over £38,000 that you take as wage and dividends, you will lose roughly 25% in personal taxes. Once you have extracted enough money to meet your personal obligations and your life style needs, what do you do with the extra money in the company? Take more money out of the business to pay your mortgage perhaps? Put it in an interest account?
If you go over the £38K limit to make extra mortgage payments, you lose about 25% of every pound over the limit immediately. But your mortgage interest is only what? 5%! if that? By doing this, you would you lose 25% to save 5% .
Put it in an interest bearing account? You will get low rates and for every penny of interest income, you pay 20% tax almost straightaway.
Well, here is one solution. Instead of putting the money in a deposit account or taking extra cash to pay off the mortgage and pay the taxes mentioned; wait! Wait until you have accumulated enough cash to invest in stocks, shares or property. By doing this, only when the company sells these assets is when the tax becomes payable. In the meantime, you have grown your wealth by investing your money, and the money from taxes that you have delayed paying, to create additional capital growth without paying tax during the growth phase. It is tantamount to an interest free loan. You keep HMRC's money, invest it, sell your investment at a profit (parts of which cost you nothing) and then pay the taxes on the gain, and I repeat, parts of which cost you nothing to create and keep the rest! Happy days.
Once you have expanded your empire this way, even if you take more than the £38K, it is not so bad because thanks to HMRC you have a lot more money.
There is an even a nicer option. Instead of selling the property, you instead sell your company by selling your shares and the person who buys your company is essentially purchasing your property (assuming that we have stripped the business of everything else first) and instead of paying personal income tax (at about 25%), you pay capital gains tax which is at much more favourable rates than than income tax.
Please note the the %'s and figures given here are only rough estimates to illustrate a point or principle. The suggestions are not applicable to everyone and other options should be examined to make a studied decision.
Don't hesitate to contact me if you have any questions. 01993 22 5000
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