Are you aware that under a new proposal outlined in the Finance Bill 2016, published in December 2015, taxes on shareholders’ distributions resulting from a solvent Members’ Voluntary Liquidation (MVL) are likely to rise in certain circumstances from the current:
- Minimum tax rate if Entrepreneurs Relief is available of 10%
- Maximum tax rate of 28%
to tax rates ranging up to 38%?
Action you need to take before 5th April 2016
If you or your clients are contemplating closing a company to extract capital via an MVL, then it is in your interest to:
- Ensure monies are distributed by 5th April 2016 to benefit from tax savings of up to 28%.
- Ensure the liquidation is commenced in sufficient time to allow a distribution to be made before 5th April 2016.
The restrictions to Entrepreneurs’ Relief in brief
The proposed new measures are designed to restrict Entrepreneurs’ Relief transactions being carried out, for the main purpose of parties to the transaction obtaining tax advantages.
For companies being liquidated the measures introduce a new Targeted Anti-Avoidance Rule (TAAR), which will apply to distributions where certain conditions are met.
In respect of solvent liquidations, who is likely to be affected?
Shareholders of ‘close companies’ need to pay close attention to these measures.
How will shareholders’ distributions be affected?
Presently shareholders’ distributions resulting from MVLs are treated as capital distributions and subject to Capital Gains Tax in the hands of an individual.
Under the new measures if certain conditions are met the new TAAR will treat shareholders’ distributions from liquidations as if they are income distributions, thus subject to Income Tax.
HMRC describes these conditions as:
- An individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up
- This means the measures affect shareholders of most privately owned companies.
- Within a period of two years after the distribution, S continues to be involved in a similar trade or activity
- For example if the individual receiving the distribution sets up again as a sole trader, a new company or as a partnership LLP.
- The circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage.
- In other words if one of the main purposes of the liquidation is to avoid Income Tax.
Are there any exemptions to the new measures?
The new TAAR will not apply where the only assets distributed during the winding-up are:
- Shares in; or
- Securities granted by
a company, which is a subsidiary of the wound-up company.
What should you do next?
Remember, the new legislation is scheduled to take effect from 6th April 2016. If you or your clients are contemplating closing down a solvent company, then we recommend you get in touch to find out in good time if your liquidation will fall within the scope of the draft legislation.
Time is running out. Get in touch now if you are considering a Members’ Voluntary Liquidation