Salary, dividends, loans, etc.
Salary, dividends and benefits in kind such as an interest-free loan, are all liable to income tax. What you need is a way to extract money from your company which isn’t income, meaning that income tax won’t apply.
The general rule
Tax legislation is full of rules which rightly prevent director shareholders from unfairly avoiding income tax and NI on money they receive from their businesses. However, these rules don’t apply to money your company gives you in exchange for goods or services (other than your services as a director or employee).
Tip. Payment you receive from selling an asset to your company isn’t income provided that the transaction is a commercial one, i.e. you’re paid no more or less than what the asset is worth.
Example. Sally, who owns and runs Acom Ltd needs £15,000 cash quickly. Acom could provide it, but she doesn’t want to pay tax or NI. Acom could lend Sally the money interest-free which would result in only a small tax bill for her. However, as Sally doesn’t expect to repay the debt for a few years this would mean Acom paying a tax charge of 32.5% of the amount borrowed. Sally owns some jewellery and art worth £20,000 which she inherited from her parents. She doesn’t want to lose possession of them. By selling some of them to Acom at market price she can get the £15,000 she needs and indirectly keep possession of the assets.
Trap. If Acom allows Sally personal use of the assets after it’s bought them it counts as a taxable benefit in kind. Therefore, Acom should store them somewhere not freely accessible to Sally.
Tip. If Acom had other shareholders selling assets to it it would mean Sally losing part of her right to them. To mitigate this a sale agreement could include a clause giving Sally first refusal to buy back the assets if the directors decide to sell.
While the cash Sally receives from Acom isn’t subject to tax or NI as salary etc., it isn’t necessarily tax free, but there’s a good chance it is. The jewellery and art are assets to which capital gains tax (CGT) applies, but as the name implies, only if a gain is made. Even if Sally made a gain, there’s no tax unless (together with all other gains made in the same tax year) it exceeds her annual CGT exemption (£11,700 for 2018/19) and tax reliefs, e.g. chattels exemption. This means the money is tax free.
The same trick can be used for other assets, e.g. furniture, cars or even quoted shares. In fact, cars and other depreciating assets work well as CGT doesn’t apply to them. Detailed records should be kept for all transactions which you make with a company you’re connected with just in case HMRC asks questions.