Taking money from Sole trader, and injecting into newly formed company

[xray123]

I want to start a new business, and use my funds from my existing sole trader business, but I am confused on whether I would have to pay tax on the money I want to take out of the sole trader business and put into the new start up company.

If I take £30k from an existing sole trader business, and inject it into newly formed LTD company - would I need to pay tax on that £30k? Would it be an expense? Would it have to be repaid?

 

[UK Contractor Accountant]

In short- No no and no

 

[xray123]

In short- No no and no

Thank you for the swift response.

Is there any potential ramifications at all?

 

[UK Contractor Accountant]

No - just need to record the £30K as a Director Loan Advance in the Ltd company books & records.

Or you maybe putting it into Share Capital?

If the company is taking over the trade & assets of the sole trade activity then I suspect you will need to consult an Accountant to ensure it is structured correctly for available tax reliefs etc

 

[Alan]

If I take £30k from an existing sole trader business, and inject it into newly formed LTD company - would I need to pay tax on that £30k?

On the face of it, my understanding is, the two 'entities' are separate, you will need to pay your taxes as self employed before you can loan it to the limited company, so yes you will owe the tax due on the self employed accounts before you can lend it to the limited company.

That said - there may be ways of getting tax relief, such as venture capital investment relief, or as mentions may be a sale &purchase of a business, all of which is well outside my understanding.

This is one where a detailed conversation with an account is required.

 

[MyAccountantOnline]

I want to start a new business, and use my funds from my existing sole trader business, but I am confused on whether I would have to pay tax on the money I want to take out of the sole trader business and put into the new start up company.

....

No and the reason being as a sole trader you dont pay tax on what you take out of the business you pay tax on the profit you make ie sales less allowable business expenses.

 

[Alan]

No and the reason being as a sole trader you dont pay tax on what you take out of the business you pay tax on the profit you make ie sales less allowable business expenses.

Interesting so a loan to a limited company, or purchase of share in a limited company is an allowable business expense for a self employed person?

I must admit that surprises me, have you got any info on that?

 

[MyAccountantOnline]

Interesting so a loan to a limited company, or purchase of share in a limited company is an allowable business expense for a self employed person?

I must admit that surprises me, have you got any info on that?

I said the OP pays tax as a sole trader on the profit he makes ie sales less allowable business expenses as opposed to money he takes out of his business.

I think you misread my post.

 

[Alan]

would I need to pay tax on that £30k?

No

Maybe I misread 'no'

What I think you mean is 'maybe' it all depends on what allowable expenses are deducted from the £30k, but lending £30k is not an allowable expense

I read the OP post to be do they avoid self assessment tax on the £30k by moving it to the ltd, and the answer is in my understanding, you don't avoid tax by lending or buying a ltd company ( unless special schemes like venture capital relief apply ) so you would have to pay any tax due on SA which may mean that the the £30k is depleted by some tax.

 

[MyAccountantOnline]

Maybe I misread 'no'

What you mean is 'maybe' it all depends on what allowable expenses are deducted from the £30k, but lending £30k is not an allowable expense

I said ''no'' because the OP wont pay tax on the £30k drawings; what he will pay tax on is his profit.

Profit and drawings are very different but it does confuse a lot of people.

Drawings arent an allowable expense.

 

[MyAccountantOnline]

Let me give you an example a soletrader makes sales of £25,000 and has allowable business expenses of £10,000 and gets a £30,000 overdraft and draws out £45,000 from his business.

Profit = £15,000
Drawings = £45,000

His taxable profit is £15,000 not the £45,000 he's taken out of the business.

 

[Alan]

Fair enough, they wont pay because they are drawing it out, but the likely hood is the balance £30k is in the account after expenses => profit. So if they loan £30k to the limited company, they will still get a tax bill ( for simplicity ) of around £6k. Assuming the £30k is all their money and they lend it to the ltd, come January next year they will need £6k repaid on their loan to pay their tax bill.

So in my version of the world, they get taxed on the £30k (based on assumptions)

( my understanding of being self employed is 'you' are the 'business' )

 

[MyAccountantOnline]

Fair enough, they wont pay because they are drawing it out, but the likely hood is the balance £30k is in the account after expenses => profit. So if they loan £30k to the limited company, tehy will still get a tax bill ( for simplicity ) of around £6k. Assuming the £30k is all their money and the lend it to the ltd, come January next year they will need £6k repaid on their loan to pay their tax bill.

So in my version of the world, they get taxed on the £30k (based on assumptions)

Assumptions are risky and we just dont know how the £30k is comprised we dont know if the OP has an overdraft, debtors, creditors etc. Cash in the bank rarely equals profit.

The fact is sole traders pay tax on profit not drawings.

 

[Alan]

I don't disagree. I was just surprised the two accounting answers were 'no' to the first question, which now I understand to be technically correct

My summary is

would I need to pay tax on that £30k? -> No, you pay tax on profit
Would it be an expense? -> No, so you will get no extra tax relief on profit
Would it have to be repaid? -> No ( unless you write yourself a loan agreement that specifies that it has to )

 

[MyAccountantOnline]

@Alan happy to have helped.

Drawings and profit really does confuse a lot of people.