You’re planning to sell your company within the next two years. In the meantime you need a substantial sum for a personal project. You could take this as a dividend but in view of the company sale is there a more tax-efficient alternative?
Getting cash out
You’re the owner manager of a company which has over £200,000 on deposit currently earning very little interest. You want to extract this money but minimise the resulting income tax bill. Usually a dividend produces the lowest tax bill for such a large sum.
Power tip. Because of the intended sale of the company, borrowing the cash from your company can be a more tax-efficient strategy. The key is in how you repay the debt.
When borrowing from your company there are two tax charges to consider.
Benefit in kind tax. If you borrow more than £10,000 from your company you’ll be taxed on a benefit in kind.
Example. At the start of 2025/26 Johann borrowed £200,000 from his company Acom Ltd. Assuming he made no repayments the taxable benefit is worked out by applying HMRC’s official interest rate (currently 3.75% per annum, simple) to the average balance of the loan. For 2025/26 the result is £7,500. As a higher rate taxpayer Johann’s tax bill on this is just £3,000. Far less costly for him than borrowing from a bank.
S.455 tax. A special tax, the so-called s.455 charge , applies where a “participator” in a company (that’s someone who owns or controls 5% or more of its ordinary share capital) borrows money that’s not repaid within nine months after the end of the financial year in which the money was borrowed. The tax is equal to 33.75% of the debt at that time but the company can get this tax back when the debt is cleared.
Option 1 - repay the loan before the sale. Assuming the company has sufficient accumulated profits (reserves) declare a dividend sufficient enough to clear the debt and avoid the s.455 charge , or at least it can be reclaimed before your company is sold. You’ll pay up to 38.35% tax on the dividend.
Example. Acom Ltd’s year end is 31 March 2026, so any loan taken out between now and 31 March 2026 will need to be repaid by 31 December 2026 otherwise Acom Ltd will have to pay the s.455 tax charge . A dividend can be declared on 6 April 2026 which is credited to the director’s loan account, clearing the debt. Income tax on the dividend isn’t payable until 31 January 2028, two years and four months after borrowing the cash.
Power tip. Agree with the buyer that the loan is not repaid until after the sale. The buyer then deducts what you owe from the sale proceeds and uses this money to repay the s.455 charge . The loan is tax neutral for the buyer but results in a significant tax saving for you.
Option 2 - repay the loan after the sale. Although you’ll have to pay a relatively modest amount of tax on the benefit in kind, your saving comes from paying capital gains tax (CGT) at 24% compared with income tax of up to 38.35% on the money used to clear the debt. If the loan is £200,000 this saves up to £30,700 (£200,000 x 39.35%) - (200,000 x 24%). Even if the benefit in kind tax is, say, £6,000 you’re still quids in.
Greater tax saving
If the gain from selling your company qualifies for business asset disposal relief, the CGT rate could be lower than 24%: 14% if the company sale is before 6 April 2026, or 18% if it’s later.
Borrow the money you need instead of extracting it as income. In the sale arrangements agree to repay the loan out of the sale proceeds. The result is that you’ll pay capital gains tax on the money used to repay the debt instead of income tax. On a loan of £200,000 this could save you tax of £24,000 or more.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.