Changes have been made to the tax treatment of distributions made by companies to their shareholders before being struck off / dissolved.
The changes, which take effect from 1 March 2012, are likely to result in more businesses having to incur the additional costs of a formal liquidation process in order to ensure the distributions are received tax-efficiently by their shareholders.
BM Advisory is able to assist directors and their advisers through the solvent winding-up process. Our flexibility on costs combined with a collaborative approach with the introducer will often result in cost savings and efficiencies, which in turn will result in higher returns being achieved for shareholders.
Where a company decides to cease trading but does not wish to go through the additional administration, procedures and costs of a formal winding up / liquidation, it could simply distribute its remaining assets to its shareholders ahead of being struck off / dissolved. However, in such cases the distribution would not be made under a winding up and so would, as a matter of law, represent an income distribution. The shareholders would then potentially be subject to an income tax liability on the value of the distribution.
But where such distributions are made by a company “in respect of share capital in a winding up” they may, under Extra-Statutory Concession (ESC) C16, be treated as the equivalent of capital payments made in the course of winding up. The distributions would then be treated as chargeable gains (rather than income) of the shareholders on the disposal of their shares in the company; this will usually result in lower individual tax liabilities, as capital gains are currently taxed at 18%/28% compared with income which is taxed at up to 42.5%. Entrepreneurs relief can reduce capital gains tax rates to 10% for capital distributions from trading companies, assuming certain strict criteria or rules have been adhered to. A Capital Gains Tax Annual Exemption is also potentially available, which exempts the £10,600 of gains from tax. Income distributions receive no such reliefs or exemptions.
ESC C16 has been moved from its current status of being an HMRC concession to being formally legislated at the beginning of 2012, and the new legislative provisions will take effect for distributions made on or after 1 March 2012. However, the legislative changes are less generous than ESC C16 because they incorporate a financial ceiling on the capital treatment; hence a distribution made by a company prior to its dissolution will not be treated as an income distribution provided that the total distributions made do not exceed £25,000.
This means that small business owners will effectively be forced to incur the additional costs of a formal liquidation process in order to secure capital rather than income tax on any distributions above £25,000. This also means that the valuation of the surplus assets could assume greater significance where the distribution on a winding up is an ‘in specie’ distribution, rather than cash, in determining whether the £25,000 threshold is breached.