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Danger in cashing up when company sells 20 Jun 2017

If your business is in a company, you need to understand tax on capital gains.

Tax law dictates you must not take any capital gains out of the company except when winding up.

Here is the big danger. You sell your business for a nice profit of, say, $200,000. Naturally, the first thing you think of is how you can use this. So you take the money out of the company and, whoops, you've “broken the law”.

What should you have done?

If you're going to wind up the company, you should first have passed a special resolution of shareholders to this effect. Not until then are you entitled to have that money. If you want to continue using the company, you must leave the money in it.

We can repair the damage by treating the withdrawal as a loan to you but this can be expensive. You would have to be charged interest at Inland Revenue rates, which are currently a little under 6%, if you have been working for the company and been paid a salary.

So often we see clients who have sold their businesses and not been aware of the rules. This can occur a year or more after the transaction and the interest bill referred to above can be quite significant. When it comes time for you to sell, please remember to talk to us before you take out any of the money.

A few of our clients are look through companies. This rule does not apply to them because, from a tax perspective, they are partnerships.

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