Close company liquidations
Changes are afoot that will see amendments to the Transactions in Securities (TIS) provisions and will take effect from 6 April this year. The changes are designed to impact distributions made in a winding up.
What are the impact of the changes?
Broadly speaking, at present, where a distribution is made in a members’ voluntary liquidation (MVL) for a trading company, the result for the recipient of the distribution will be a capital gain. This capital gain will be taxable at either 10% if the shareholder is entitled to entrepreneurs relief, or alternatively 18/28% depending on their other income.
The new changes will impact distributions made post 6 April this year where certain conditions are met. What they will do is to tax the distributions made under a MVL as an income distribution rather than a capital distribution. Effectively the member is treated as receiving a normal dividend. The tax rates then become a little more penal!
What are the conditions that must be met?
A. The company being wound up must be a close company or can be shown to have been a close company in the two years prior to the winding up.
B. The person receiving the distribution is involved with carrying on the trade or activity that is similar to that which was carried on by the company being liquidated. The individual will be considered to be doing so where he or she does so directly through a Limited company that they control or is controlled by someone they are connected with.
C. That it is reasonable to assume that the main purpose of the liquidation is the avoidance or reduction of a charge to income tax.
It is probably fair to assume that in respect of condition C, HMRC will seek to argue that if a pre liquidation could have been paid but was not, this was part of an arrangement made with the company by its shareholders the main purpose of which was to avoid income tax.
So what should clients be considering? The last decade has seen tax legislation that has encouraged people to operate via a corporate structure. However many of these incentives have been removed over the past year or so.
We have seen the removal of entrepreneurs relief on incorporation. Couple this with the inability to claim a deduction for amortisation of goodwill in such circumstances and a hike in the dividend tax rate from 6 April 2016 and the incentives for operating via a Limited company are few and far between.
Clients should be considering disincorporation. That may take the form of a MVL – in which case they need to get their skates on! Remember that the new rules bite on distributions post 6 April 2016 – the MVL itself does not need to have been concluded by 6 April.
There are of course many traps that need to be avoided on disincorporation – consider the impact of a transfer of the company’s goodwill. Is the goodwill old (pre 2002) goodwill or new? Does it have a base cost? Will disincorporation relief be available?
Clearly there is a lot to consider and only a short time to do so. However with the help a a good liquidator and a competent tax adviser there are clearly tax advantages to be had from a MVL followed by a succession say as a LLP.
If you have clients considering this but are worried about the potential pit falls please contact us as soon as possible.