Tax-efficient profit extraction for a trading company: a client case study
· Posted on: November 19th 2025 · read
This insight was written by Paul Clough, Tax Advisor at MHA.
Background
A well-established manufacturing company, led by two unrelated directors, faced a strategic challenge: how to extract surplus profits from their trading company in a tax-efficient way.
After years of successful operation, the directors were already receiving optimal salaries and maximum employer pension contributions.
They had no significant personal income needs and were keen to explore options that would:
- Avoid triggering higher rates of personal tax
- Allow them to invest surplus profits independently of one another
- Ensure the trading entity retained eligibility for key tax reliefs
The Challenge
Extracting excess profits via dividends paid to the directors presented several problems:
1. Tax inefficiency: Dividend payments are subject to additional income tax resulting in a depletion of funds held within the company by up to around 40%
2. No significant income requirement: The directors' expenditure and lifestyle needs were already met with their current level of remuneration and dividends
3. Risk to trading status: The level of cash held within the company had the ability to affect the company’s trading status, potentially resulting in them losing entitlement to certain reliefs, such as Business Asset Disposal Relief and Business Relief
Our Solution
We identified a more strategic route that aligned with the directors’ financial objectives and the company’s long-term stability.
Recognising an opportunity, we proposed that profits could be extracted to a corporate shareholder instead, being held separately within each ‘InvestCo’ company.
How did this work?
- Each director established a separate corporate shareholder.
- Profits were then extracted not by personal dividend, but via dividend to the corporate shareholder.
- This was done without triggering personal income tax or capital gains tax.
- The structure was carefully planned for via a Steps Plan, and relevant tax considerations were made to ensure compliance. A well drafted clearance application was also submitted to HMRC in advance, and agreed, before execution of the planning took place by the client’s chosen legal advisers.
- This gave all parties the assurance that the proposed structure would not give rise to unintended tax consequences, once implemented.
- Once in place, the structure allowed surplus cash to be distributed to each corporate shareholder by way of intercompany dividends, which are tax-free.
- This kept investments and funds separate from the trading company and allowed each director to pursue separate business opportunities and independent investment decisions, such as retirement or exit planning.
Long-Term Planning
Funds held within the corporate shareholders can be used for:
Future retirement or exit strategies
Supporting a management buyout
Creating a succession plan for family members
Key outcomes and benefits
With the new structure in place, each unrelated director was able to successfully extract additional profits in a tax-efficient, flexible, and risk-conscious manner, allowing them to fund their current lifestyle, and without the need to do so personally.
The key benefits include:
- Removal of excepted assets from the Company’s balance sheet
- Allows post tax profits to be extracted from the trading company free from the depletion of income tax
- Corporate investments held away from trading companies and subsequent trading risk
- Potential for the corporate shareholder to benefit from Substantial Shareholding Exemption on potential sales of the trading entity in the future
- Preservation of trading status and eligibility for Business Reliefs
- Allows directors to have independent control over investment decisions via separate investment companies
- Separation of trading and investment risk
Key Takeaways
This case demonstrates the value of partnering with experienced tax advisors who can navigate the complexities of corporate structuring and HMRC engagement, and implement a structure for the clients’ short, medium and long-term goals.
Although our client had an existing relationship with their accountant and financial advisor, they gained significantly from our ability to:
Design and implement a tax-efficient profit extraction solution
Align profit extraction with personal and business goals
Provide a long-term strategy that supports exit or succession planning
The business now has a clear path for extracting surplus post tax profits and is well-positioned for either an eventual sale, management buyout or succession planning for younger family generations.
This case demonstrates the value of partnering with experienced tax advisors who can navigate the complexities of corporate structuring and HMRC engagement, and implement a structure for your short, medium and long-term goals.
Looking ahead
This strategic approach transformed our client’s challenge into a tailored wealth-building opportunity, without impacting on the trading business. It highlights the importance of considering both personal and corporate tax outcomes when planning profit extraction.
By applying a holistic and forward-thinking approach, we transformed a challenging situation into an opportunity for an alternative method of extracting profits from a corporate entity, and ensured the business is now well-positioned for:
Future investments
Tax-efficient exits
Long-term financial success
By applying a holistic and forward-thinking approach, we transformed a challenging situation for our client into a a tailored wealth-building opportunity.
MHA Can Help You
If you're a business owner or high-net-worth individual with surplus profits tied up in your company, there may be more effective ways to extract value without triggering unnecessary tax.
Whether you're planning for retirement, succession, or simply looking to invest outside your trading entity, contact our Private Client Tax team who will be happy to guide you on suitable solutions that are aligned with your goals.
Find out more about our private client tax services here.
For more information
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