How to Extract Cash From a Company Before Selling

In short: Most owners selling a profitable limited company have cash in it that the business does not need. Before a sale, that cash can be taken out as dividends, salary or bonuses, employer pension contributions or repayment of money the company owes you, or it can be left in for the buyer to pay for as part of the price. Each route is taxed differently, some can affect the reliefs available on the sale, and several are restricted once a deal is agreed. The best combination depends on your figures and your timescale, and it is far easier to get right when planning starts years before a sale rather than weeks.

Retained profit builds up quietly. A company that has traded well for several years can easily hold more cash than it needs, and when a sale comes into view the question of what to do with it becomes surprisingly important. This article explains the options and the issues that decide between them. It forms part of our complete guide to business exit planning, and our overview of tax when selling a business covers the wider tax picture.

Why does cash in the company matter when you sell?

Most share sales are priced on the basis that the buyer receives the company with no cash and no debt, plus a normal level of working capital to keep it trading. Surplus cash is then added to the price and debt is deducted. In principle, every pound of genuinely surplus cash is paid for by the buyer.

In practice, three things complicate that. The tax on cash you take out before the sale is usually different from the tax on cash the buyer pays you for. Holding too much cash can affect the reliefs available on the sale. And buyers and sellers often disagree about how much of the cash is genuinely surplus and how much the business needs to keep running, which is negotiated through the working capital mechanism.

What are the main ways to take cash out before a sale?

Each route has its own tax treatment and its own limits. The table gives an overview rather than a recommendation, because the right mix depends on your circumstances.

Assets other than cash raise similar questions. A company car, an investment or a property held in the company may need to come out before a sale if the buyer does not want it, and moving assets out of a company to its shareholders has tax consequences of its own.

Should you leave the cash in and let the buyer pay for it?

Often that is the starting point, because cash paid for by the buyer usually forms part of your gain on the shares rather than being taxed as income. For many owners that produces a lower tax bill than paying the same amount out as a dividend.

It is not automatically the better choice, though. A buyer may argue that some of the cash is needed to run the business, which reduces the amount they treat as surplus. More significantly, holding substantial cash that the business does not need can call into question whether the company is a trading company for tax purposes. Our guide to Business Asset Disposal Relief explains why that matters, and why the consequence can affect the whole of the sale rather than just the cash.

Consider a County Durham construction company that has built up several years of retained profit to protect itself against late payments. The owners may see that cash as a sensible buffer. A buyer may see part of it as working capital they expect to receive for nothing, and HMRC may take a view on whether it was really needed for the trade. The same balance can be described three different ways, and the description that applies affects the tax.

How can surplus cash affect your reliefs?

Reliefs on the sale of shares generally depend on the company being a trading company. Cash that is clearly held for the business, such as funds set aside for working capital, planned investment or known liabilities, is usually viewed differently from cash that has simply accumulated with no purpose.

Whether a particular balance crosses the line is a matter of judgement rather than a simple test, and the evidence of why the cash was held matters. Decisions recorded at the time carry more weight than explanations put together when a buyer appears. If you want a view on your own position before that happens, our tax advisory team can review it.

What about loans between you and the company?

Director's loan accounts are usually settled before or at completion, and buyers check them carefully during due diligence. If the company owes you money, for example because you lent it funds in its early years or left salary unpaid, repaying that balance generally returns your own money to you without further tax, provided the records support it.

If you owe the company money, the position reverses. The balance has to be cleared, and the method chosen can trigger tax for you, the company or both. Overdrawn loan accounts that have been carried for several years can also raise questions a buyer will want answered, so they are best resolved well ahead of a sale.

What rules limit cash extraction before a sale?

Several sets of rules apply, and they work in different ways.

Company law requires dividends to be paid only out of distributable profits, and directors need to be satisfied that the company can continue to meet its debts afterwards. Dividends paid without the right records or reserves can be unlawful, and may have to be repaid.

Tax law contains anti avoidance rules aimed at arrangements that turn what would be income into capital, or that extract value in ways designed mainly to reduce tax. A planned combination of extraction and sale can sometimes fall within them, which is why the order of the steps and the reasons behind them matter.

The sale agreement adds its own controls. Once terms are agreed, payments to you are usually restricted, and under a locked box mechanism they are generally prohibited after the locked box date except for amounts specifically permitted. Cash taken out at the wrong moment can simply come back off the price.

When should you start planning cash extraction?

The earlier the better. Spreading extraction over several tax years can make a real difference to the tax paid, pension planning often works best over a period rather than in one large contribution, and the trading status of the company is judged on its history rather than its position on the day of sale. Once heads of terms are signed, most of the flexibility has gone.

Cash extraction is one part of a wider plan, and it overlaps with decisions about structure, timing and what you need from the sale. If the buyer is likely to buy assets rather than shares, the question becomes how to take the proceeds out of the company afterwards, which our guide to asset sale vs share sale covers. Because pension and investment decisions sit between your company and your personal wealth, it also helps to understand how accountants, tax advisers and financial advisers work together. If you are still shaping your plans, our guide on how to create a business exit strategy and the Exit Readiness Scorecard are good places to start.

How can Pulse help?

We help owners decide what should happen to the cash in their company long before a buyer starts asking about it. That includes establishing how much is genuinely surplus, modelling the tax on each route out and on leaving it in, checking the loan account and reserve position, and looking at whether the company's cash could put reliefs at risk.

When a sale is under way, we work through how cash, debt and working capital are treated in the terms you are offered, and alongside your solicitor on what the sale agreement permits. Our business valuation work sets out what the business itself is worth, and our exit planning service brings the wider preparation together.

For the full picture, read our business exit planning guide, or speak to our team about the cash in your own company.

FAQs

Should I take cash out of my company before selling it?

Not automatically. Cash the business does not need can often be taken out before a sale, but whether that is better than leaving it in depends on how it would be taxed each way, whether it affects your reliefs and what the buyer expects to find in the company at completion. The answer is different for every business and is best worked out before a sale process begins.

Will a buyer pay for the cash in my company?

In a share sale, buyers usually pay for surplus cash on top of the price agreed for the business, because most deals are priced on the basis that the company is handed over with no cash and no debt. Cash needed to run the business day to day is normally treated as part of working capital rather than paid for separately.

Is it better to take a dividend before a sale or leave the cash in?

It depends. A dividend is taxed as income, while cash left in and paid for by the buyer usually forms part of your capital gain. The capital route is often cheaper in tax terms, but surplus cash can put reliefs at risk on the whole sale, and anti avoidance rules can apply to some arrangements. The right choice needs modelling on your own figures.

Can my company make a pension contribution for me before a sale?

Often, yes. Employer pension contributions can be an efficient way to move cash out of a company, but they are subject to personal limits and to conditions about whether the company can deduct them for tax. Large contributions made shortly before a sale should be planned carefully and discussed with a regulated financial adviser as well as your accountant.

What happens to my director's loan account when I sell my company?

It normally has to be settled before or at completion. If the company owes you money, it can usually be repaid to you without further tax. If you owe the company money, the balance needs to be cleared, and how that is done can have tax consequences of its own. Buyers will check these balances during due diligence.

Can I take money out of the company after agreeing the sale?

Usually only in limited ways. Once a price has been agreed, any cash you take out affects what the buyer is getting, so the sale agreement normally controls it. Where a locked box mechanism is used, payments to you after the locked box date are generally prohibited except for amounts specifically permitted in the agreement.