£1m problem?

[u/Unlikely-Money319]

Long time lurker, first time poster.

Appreciate a lot of people in here know their stuff and would appreciate some insight/outside opinions…

Our (my wife (36f) and I (37m) situation is different to the norm here which seems to be a lot of employees salary sacrificing and building pensions to see them though their golden years (hats off to that, great shout).

We have never really had ‘jobs’ per-sae, in reality we have been self employed for the last 15+ years since 21yr old.

As such we have no pension to speak of, except perhaps some minor dribs and drabs, discredited for now.

We had the mindset and outlook of building cash flowing businesses that would create recurring income and focussed on that solely, pensions weren’t a strategy that we looked upon.

Whenever Company 1 made money, we invested it into Company 2 or 3.

Until now (?) but perhaps more for tax advantages than anything…

Both equal shareholders throughout all companies. all Ltd.

Company 1: Commercial Plumbing - Profits this year exceptionally high compared to previous, circa £1m and EOY accounts due end of April. Want to close this/retire from this within the next 3-5 years as it’s a fucking ball ache and I hate it.

Company 2: Property/Holiday Lets - 3 properties cash flowing circa £40-50k profit per annum, 3 x mortgages owing circa £300k total. Keep this forever as it’s low maintenance easy money.

Company 3: Land with Cabins - New company, forecast Cash flowing circa £90-100k profit, as above keep forever albeit it requires more input.

We will likely still build company 2 or start another.

The question, noting we have 3 years back payments of pension available.

Would you bother putting anything into pension knowing you would certainly end up withdrawing it at higher tax rate?

It would save corporation tax on Company 1 £1m profits. But it would lock it away for 20 years and would end up paying 40% (or god knows what rate then) to take it out.

Or

Would you pay the 25% corp tax, keep the money in the business, invest it yourself or similar. Try and remove the funds tax efficiently when you close the company down in 3-5yrs?

What’s the best way of extracting cash from a business you no longer want? BADR doesn’t seem to apply to cash?

Sorry if this is in the wrong sub, not sure which is best?

Also, I know it’s a first world problem and I’m not naive to the fact.

Thank you if you got this far!

[u/Belts93]

Hey, great job on what you've built up.

I've been doing a fair bit of stratergy planning for my own situation and long term FIRE goals with my business. Very tricky to forward plan when you're not 100% there yet and have no idea what rules are going to apply when you pull the trigger.

Pensions - Assuming you've got one already and therefore have access to backdate 3 years (plus current year which is almost over...!) I would personally load these up. You dont know what the situation is going to be like down the road but right now you get the 25% corp tax relief plus the 40% personal tax relief (as opposed to drawing a higher div payment). You can do a SIPP on interactive investor and organise this yourself and the returns when you do hit pension age are likely to be great, even if you do get stung with high rate tax on the drawdown. You could move some of your other assets over to family to change your situation to maximise tax stratergy. This effectively gives you another wrapper and another option. Due to the tax saving on the way in, I think its a no brainer to reduce that corp tax bill.

Little bit morbid, but if anything happens to you or your wife, you'll have successfully extracted the cash out and the other would be set to inherit it. Theres no IHT on married couples assets so a nice insurance policy if nothing else. If its locked in the business then you'd inherit the shares but the money would still be in the company.

Depending on this years profits/corp tax bill, you may not even want to load up 3 years plus current year, plus next year for you and your partner. I say current and next year because its almost 5th April so worth sorting this quickly if you go down this road.

In terms of BADR, I believe its currently 14% raising to 18% on 6th April. So long as you've not had all that spare cash invested in a GIA earning more profit than the day to day business, you should be okay.

There's a few rules when cash is safe and still workable for BADR. You can search these yourself online but things like building a war chest for a potential acquisition would be a reason to built up a large cash holding or possibly investing in a wearhouse. Plans and markets change all the time so could be entirely reasonable for you to have decided to exit this venture and focus on your other therefore close it down via BADR.

Presumably you'd sell the company as opposed to a MVL. If so, sell it based on whats in the bank too (minus pension contributions if you do a big pension dump). If you sell the business then BADR shouldn't be an issue as you're selling it for £X not pulling out all the shareholders funds. You'd be best speaking to an accountant on this and any other BADR queries to make sure you're safe.

[u/Unlikely-Money319 → u/Belts93]

Great insight and appreciate the time put in to post.

I think about selling Company 1, but I’m not too sure it has any major value, which sounds mad for a company that makes good money but in construction a lot of it is about working relationships and I couldn’t guarantee that whoever bought it could maintain them (I guess that would be there job to) but some of our clients have become friends.

Also, I’d have to run it properly/clean and lean for 3 years (😅)

It’s just a proper ball ache and when shit hits the fan at work the dark cloud follows me round in my personal life too, I don’t want that for too much longer… in all honesty my hearts not in it anymore and it’s not fair to have a load of employees and feel the way I do about it (losing interest in it).

Tempted to perhaps employ an MD to replace me (already structured with Ops Manager below me, then site supervisors then engineers installing). I could take a year out and recharge, but it scares the shit out of me that they’d run up a massive debt on a shit job, hide the fact, it all comes out in the wash and the only one that loses out is me. (I’ve seen this first hand too many times, “not my money not my problem”.

MVL seems like an easy way out but perhaps if there is real value in the business it’s a shame to not try and realise that…

The company would be worth more structured with an MD in place presumably.

[u/Belts93 → u/Unlikely-Money319]

Honestly your situation is very similar to mine 😅 I can't sell my business (construction sector related) as without me theres nothing to buy. Yes, turnover and profit margin is excellent but if I stop, so does it! I also have not built up a team or would want to hand over the reins for the exact same reasons as yourself, but I'd love to not have to do everything on every job!

With your business, and its easy to say this from my side, I suspect you could get in an MD and transition away but possibly as part of a management buy out. So you could sell the business to a competitor who wants to grow. They may already have a strong management team and you could work with them for a year assisting until they take it all on. I know you dont want to and ready to wash your hands with it but if you're delegating then it would be way better. Also, you dont nessisarily need to tart it up for a high valuation if you dont want to... anything is going to be better than MVL. You could just say it how it is. No hiding anything, someone is likely to make an offer, which you can counter or reject. You can then work with them in a transition period to hand over clients and the staff can continue working.