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Greater Awareness Needed Around Solvent Liquidations Tax Relief

Solvent liquidations are a means of reducing your tax levels as an individual if you have an overdrawn director’s loan account (DLA). The process is entirely in line with relevant legislation and can result in significant savings on an annual basis but relatively few people are aware that the option exists and fewer still take advantage.

Unwitting overpayment

Some companies risk unwittingly paying in excess of 20 per cent more tax than necessary due to a lack of awareness about the available relief. The reason for this is that overdrawn directors’ loan accounts which are not repaid within nine months of the end of the Corporation Tax accounting period attract a withholding tax of 25 per cent.

Accumulated overdrawn DLAs will eventually need to be repaid and/or re-distributed by way of salary or dividends which could attract personal tax at a rate of between 32.5 per cent and 45 per cent if you’re a higher rate tax payer.

Significant savings

The means of avoiding these extra taxation charges is referred to as a solvent liquidation, which is a perfectly legitimate method of reducing a tax bill where doing so is deemed a priority.

Entering solvent liquidation opens up the prospect of what are known as ‘Section 455’ taxes being recovered and paid to the owners of the company involved. The liquidator will manage the process and ensure that money is transferred to owners via capital distribution, a process from which funds are eligible for entrepreneur’s relief and are taxed at a rate of 10 per cent.

Having funds taxed this level on a sizeable scale can result in very significant savings for company owners and directors, who might otherwise see these same amounts taxed at a level somewhere between 32.5 per cent and 45 per cent. In cases where tens of thousands of pounds are involved therefore, the option of solvent liquidation can emerge as a favourable one and a potential money-saver whatever a company’s broader financial situation might be.

Awareness is crucial

We hear of one or two situations each year when directors have not been made aware of this tax relief and ended up paying much more than necessary to the taxman. With the economic recovery firmly underway businesses need to be able to deploy funds in a judicious way in order to see them invest and grow.

A solvent liquidation is a great way of releasing funds that would otherwise be lost to taxation for any purposes deemed worthwhile by business owners. Solvent liquidation can be structured in a way that allows a business to continue operating as normal and potential to prepare more effectively for the future.

Expert advice

You can call a Begbies Traynor specialist directly at any of our offices around the UK and arrange a free and confidential consultation to discuss your solvent liquidation queries.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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