Extracting Cash from Your Company TAX FREE
Extracting Cash from Your Company TAX FREE Scenario 1 Sean and his wife Mary have managed their own company for the last 12 years. They both work in the business full time on a salary of €50k each, they own the company on a 50/50 basis and they are both age 51. They have 3 children age 24, 22 and 18. Sean and Mary do not believe that any of their children will want to take on the business and they are planning on selling their business 5 years from now, at age 56. They are hopeful that they can sell the company for €1.5m. The company has excess cash in the bank account of €200,000, the company paid corporation tax last year of €12,500 and they expect profits to be €100k each year for the next 5 years. THE PLAN
Sell the company 5 years from now for €1.5m which is €750k each tax freeby utilising retirement relief.
Put excess company cash of €200k into Sean and Mary’s pensions now. This can create a loss in the company of €100k this year. This loss can be rolled back one year to claim back the €12.5k corporation tax already paid on last years profit. No corporation tax payable this year either. This cash can now be invested while in the pension structure and any growth is not subject to tax in the pension.
Each year for the next 5 years put the yearly profit of €100k/year into Sean and Mary’s pensions. This eliminates the company profit each year and therefore no corporation tax is payable. Effectively all company profits are put into their pensions which means that they avoid paying any company tax and instead keep the profits in their pensions.
When Sean and Mary sell their company and cease being employees they can each receive a tax free ‘termination payment’, based on calculations which can be a maximum of €200k each tax free.
After the company sale, when they cease being shareholders, directors and employees of the company, they can access 25% of their pensions and receive up to €200k tax free eachfrom their pensions.
The remaining 75% of their pensions are then used to give them a pension income to replace the salaries that they were receiving from their company.
The total amount of cash that Sean and Mary can receive in the above scenario is up to €1.15m each, a total of up to €2.3m tax free. This scenario shows the benefits of good planning. Please make sure that you discuss your own particular situation with an advisor to ensure that you do not miss out on any reliefs available to you. We are happy to have an initial telephone conversation with you to give you some ideas that may suit your circumstances. Feel free to call Joanne in our office on 01 5267770 and she will see if we can help you.