Cash withdrawal planning

Cash withdrawal planning

Cash withdrawal planning

Posted: 28/09/2021

As a family business owner, your focus may be on growing and protecting the wealth of the business.  However, this can often be at the expense of your own individual financial needs. 

Whilst the wealth and growth of your business is vitally important, which can be the driving factor of creating a successful enterprise, it is equally important to manage, plan and structure your own personal finances, an area that is often neglected.

When you are ready to take a step back away from the family business and enjoy your retirement, you will need to consider personal wealth management which is a fundamental aspect to protect your future finances and assist with your retirement plan.  One keyway of doing this is by efficiently withdrawing cash from your business.

Cash withdrawal is an option to consider as part of the wealth management plan for family business owners as it can ensure that cash is efficiently withdrawn from the business and built into your retirement fund in a tax efficient way. 

There are a number of ways of efficiently withdrawing cash from the business without it negatively impacting on its financial position, for example, through salaries, pension contributions, dividends, or other distributions.

For a family business owner operating via a limited company, paying yourself a small salary each year is one way of efficiently withdrawing cash from the business.  We can work with you and your financial advisor or accountant to ensure that cash withdrawal via salary is planned in the most tax efficient way, taking into account your personal allowance and income tax / NIC and corporation tax considerations.

Another way of efficiently withdrawing cash from your business is by declaring a dividend. A dividend is by its very nature a distribution of the business’s profits to its shareholders.  In order for you to lawfully pay a dividend, your business must have sufficient distributable profits. Ordinarily, dividends are paid periodically during the course of the company’s financial year but can be fixed pursuant to a formal dividend policy. Dividend income tax rates have increased in recent years but are still lower than income tax rates applicable to salary.

There are other ways to make distributions out of a company’s assets, including dividend in species which are similar to cash dividends but allows for the company to distribute an asset or property rather than cash, and also redemptions. Redemptions involve the company purchasing back its own shares out of distributable profits.  This can be an effective way of withdrawing cash from the business as part of your personal wealth management, as it is a great way of ‘cashing in’ your shares when it is time to take a step back. However, in order for the shares to be redeemed, they must be issued as redeemable shares from the outset. Our team of family business lawyers can assist in advising on your share capital to ensure it is structured with your wealth management plan in mind. We can also advise you on the tax treatment of any buy back of shares, in particular around the qualifying conditions for tax efficient ‘capital’ treatment.

Finally, another way of withdrawing cash from the business, and an option that is becoming more popular, is by using a members’ voluntary liquidation (MVL) to strip out large amounts of cash from a company that is no longer required. An MVL involves the value of the assets of a company being realised and the proceeds being distributed to any creditors and the shareholders of the company. An MVL should be distinguished from a compulsory liquidation, which is usually instigated by a company’s creditors. An MVL is commenced by the shareholders and can only be carried out by a solvent company. This can be a preferred cash withdrawal mechanism for some family business owners and is often very tax-efficient; however, it should align with your individual objectives.

As set out above, there are various ways of efficiently withdrawing cash from the business without it negatively impacting its financial position.  However, not all methods may be suitable to all businesses, and it is important that you seek professional advice.  

Here at Brabners our team of expert family business lawyers are able to guide you through the various options available and can advise you on the most suitable way to withdraw cash from your family business whilst working with your financial advisors and accountants to ensure all tax and financial implications are considered.