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Dividends From After Tax Profits


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Hi all,

 

I’ve recently posted about dividends and as I understand more I have more questions.

 

So, I understand I can only take dividends from after tax profits of a Ltd property company. But, can Capital expenses be excluded from the calculations?

 

The reason being is my company’s properties have been funded through directors loans and therefore the company is technically tens of thousands of pounds in the red. Is it the case that I can only take dividends once all of the director’s loans have been paid off as this seems quite unlikely to happen for a good few years.

 

Im hoping that I’ll be able to consider after tax profits to be revenue income/expenditure as this is a much more reasonable figure to deal with.

 

Many Thanks,

Jordan

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  • 2 weeks later...

Hi Jordan

I hope I'm understanding your question correctly...

Dividends can be paid for any amount up to and including your total profit for the year. Total profit is income minus revenue expenses so capital expenses don't really come into it. The fact that your company owes money on a director's loan or even on a mortgage doesn't mean that it has made a loss.

So you don't have to wait until you have paid back the director loan before you take any dividends. Of course you will have to pay tax on any dividends you take (although you get an allowance of £5k for 17-18 and £2k for years after that) at 7.5% for any income in basic rate band or 32.5% in higher rate band. In this case, you might prefer to pay some of your loan back to yourself instead.

Does that answer your question? A further complication is that, depending on the accounting standards you adopt - your accountant can discuss - you might have to charge depreciation as an expense before arriving at profit. This is simply a bit of your capital expenses that is spread out over a number of years, perhaps 50 for buildings, etc.

all the best

Daryl

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Hi Jordan

Depreciation is a cost in the profit and loss account which represents the 'wearing out' of assets. So, if you bought a machine for £10k which lasted 10 years, you would have £1k per year as a cost (the £10k isn't a cost as you have just 'swapped' cash for another asset). Sometimes, you might use a different pattern of spreading the cost out over the years, e.g. vehicles would depreciate more heavily earlier on in their life.

Depreciation doesn't usually apply to properties that are likely to increase in value. However, one of the simpler ways of presenting your accounting information used for a lot of smaller companies (FRS 105 - ask an accountant about it when you're sleepy) insists that you depreciate buildings. So, say you had 1 building for £100k which generated you £5k per year of profit after costs, then you would also need to reduce profits by (for example) a fiftieth of £100k or £2k. Profits available for dividend would then be £3k.

When you came to sell the building, the gain would be sales price minus net book value (purchase cost minus depreciation charged so far), and you would 'get back' all the profit you 'lost' to depreciation at this point.

It's very important to note that taxable profits are different to your own books. The taxman will ignore any of your depreciation costs and tax you on a higher amount (the £5k in my example above). There are different rules for things that traditionally wear out like machines but not property.

Are you glad you asked this question?!

cheers

Daryl

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49 minutes ago, debbie franklin said:

No need to depreciate investment properties

Hi Debbie

Under FRS105 it is mandatory even though the Financial Reporting Council argues against it - 

  1. It was noted that some of the simplifications made in FRS 105, including the omission of some of the disclosures required by FRS 102, would not have been introduced if they had not been necessary to ensure legal compliance with the micro-entities regime. For example, the FRC continues to believe that investment property should always, when practicable, be measured at fair value as this provides more relevant information to users of the financial statements of a company’s financial position and performance. However, company law prohibits the revaluation of any asset by micro-entities and instead requires that fixed assets are measured at cost less depreciation and impairment.

If you've been able to submit micro-entity accounts under FRS105 without being required to depreciate (to zero not a residual value) then please let me know as it would make my books much easier!

kind regards

Daryl

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On 19/04/2018 at 4:21 PM, debbie franklin said:

I don't know if it helps but spoken to our Audit Partner and he advises that under FRS 105 you also consider residual value when setting depreciation rates and useful Iife so if property increasing in value then residual value is at least cost so you could justify depreciation of nil?

It's a big help thanks @debbie franklin. I did more research and challenged the accountant doing my filing over whether a residual value was allowed or not (he said it wasn't last year). Thankfully, my research, spurred on by your comment, has swung him and I've been able to correct depreciation to a much more sensible (i.e. close to zero) level!

I couldn't be bothered with FRS102 as it's mainly funded by interest free loans, which need a complex discounting calculation, and I don't want the additional information to be disclosed.

thanks again

Daryl

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