Given the recent economic downturn, the issue of a company’s liquidly and its ability to make payments to the business owner to fund matrimonial settlements has become an ever more important part of our instructions.
What we are seeing more and more is that many companies are asset rich but cash poor, meaning that the value of a parties business or company can become irrelevant if a company has no significant capital available with which to fund a settlement.
We are commonly instructed to assist the Court in identifying any liquidity that exists and whether any company assets can be used for the settlement, without damaging the business. In addition, our instructions are often extended further to include our opinions as to the most tax efficient manner by which any available capital can be released.
In seeking to determine whether any liquidity exists, we have to consider a number of key questions, including:
• Is it possible for the company to sell an asset without any detrimental impact on the business? For example, does the company have a piece of machinery that is rarely used which could be sold, or land that the company does not need.
• Is the business able to obtain and service any additional borrowings? This typically requires us to undertake an evaluation of a company’s current level of borrowings and consider the Company’s relationship with its bankers, the banks attitude to lending, the nature, value and suitability as potential security of assets and evaluate the Company’s future profitability.
• Could the company undertake the sale and lease back of an asset which would provide additional funds for the company?
• To what extent the company needs to retain funds within itself in order to safeguard its financial well being or to enable it to undertake expansion?
Extracting the funds
Once we have identified that liquidity exists, the next step is to identify the most tax efficient way that the sums can be distributed to the parties.
Again we have to consider a number of key questions, including:
• Could the sums be paid as a bonus or an increase in remuneration to the business owner? Obviously these will attract income tax and National Insurance. If the husband is the sole director then this may be an option. However, if other directors exist, there may be resistance to increased payments to one but not all.
• Could the sums be paid as dividends? The payment of dividends to shareholders do not attract National Insurance and may be a tax efficient way of withdrawing additional funds for the individual. Additionally, whether the company has sufficient available reserves to enable the dividends will need to be considered. Any other shareholders will also receive their share of the dividends voted, unless they waive their rights or separate classes of shares exist.
• Does a directors loan account exist? If the company repays money it owes to the business owner, there will be no tax consequences.
• Can the Company afford to make a loan the business owner? Again, there are a number of restrictions for companies making loans to directors and shareholders that will need to be considered.
• Can the company buy back shares from a particular shareholder? This approach could release funds to the business owner and/or their spouse, if they also hold shares in their own right. Again, before recommending this course of action there are a number of important company law requirements and tax consequences of the buy back to consider, as well as the impact of any change in the shareholding in the company after the buy back.
The issue of extracting funds from the business to fund a matrimonial settlement is becoming clearly more important, especially in light of the many tax planning schemes which are now seen to be unravelling, which is causing many headaches for those seeking to determine what settlement should be made.
If you feel we can help in this area, please contact Nick Baker on 0121 711 2468.