Assignment on FIVE methods of cash extraction from Munroe ltd. Munroe Ltd. has been trading profitably as a shoe manufacturer for many years. The €10 ordinary shares in Munroe Ltd. are held as follows:
Tom Munroe 15,000
Gerry Curtis 5,000
Pierce Munroe (Tom’s son) 10,000
Tom is aged 54. He has been a Director since 1990 and has always worked full time for the company. His wife Mary, who designs a shoe line for the company, is putting him under pressure to retire, particularly as his relationship with Gerry Curtis has been very strained in recent years and is beginning to impact on the business.
Mary is unpaid for her designer role.
Tom has agreed to retire in the next five years. He currently does not have a pension fund but he has heard from a friend that the company should be paying into one for him and his wife.
The market value of assets and liabilities are currently as follows:
Non Current Assets € €
Land and Buildings 900,000
Plant and Machinery 300,000
Trade Receivables 51,000
Cash 2,000,000 2,101,000
Less: Current Liabilities
Payables 51,000 2,050,000
Net Assets 3,450,000
Share capital & Reserves 3,450,000
Tom inherited his shares on the death of his father, Frank, in August 1990. Frank had acquired the shares for €20,000 in 1970. Their value at 5/4/74 was €35,000. The value of the shares at the date of Frankʼs death was €500,000. It is accepted that the current value of Tom’s share reflects 50% of the net asset value of the company.
Tom wants to exit the company with enough money to fund his life style. He does not want to sell his shares to Gerry.
Tom’s taxable emoluments, (including benefits-in-kind), under Schedule E are €90,500 per annum and have been for the past 5 years. Tom had commenced employment with Munroe Ltd on 5 December 1990.
Pierce, Tom and Mary’s son, lives beyond his means and has no savings. His father has approached him to enquire whether he is interested in buying Tom’s share of the company. Pierce is interested in doing so and may be able to take out a bank loan at a rate of 5% p.a.
Tom has visited you for tax advice. At this meeting you discussed relevant tax planning points in respect of his proposed retirement from Munroe in five years’ time and his desire to fund for his retirement. Particularly he would like you to explore whether it is suitable for him to take extra money from the company over the next five years as dividends and/or whether a company pension scheme should be set up and funded. He had also heard about reliefs available on retirement and has asked you to include consideration of this in your report.
The bottom line is that he would either increase the money he extracts from the company each year for the next five years so that he can build up his personal savings for retirement or sell his shares to either his son or Munroe ltd. He is also willing to consider a combination of tax saving exit strategies. He is confused and needs your help.
Prepare a detailed report for Tom Munroe that:
- Sets out at least FIVE methods of cash extraction from Munroe ltd.
Clearly quantifies and discusses all the taxation implications of each option you have described in (i) above, from:
Munroe Ltd’s point of view;
Tom’s point of view; and
Mary and Pierce’s point of view
- Which option would Tom prefer and why?
- Which option would Munroe prefer and why?
- Which option would Mary and Pierce prefer and why?
- Advise on any non-tax consideration that your client should take into account.
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