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Changes in the new tax year regarding winding up

View profile for Christopher Buck
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Many companies deliberate over whether and/or when to wind up their company when there is a desire to distribute its value. This decision may become a whole lot easier for companies to make further to the Draft Finance Bill 2016 and restrictions proposed as a result. 

Changes to be made

The Draft Finance Bill 2016 has suggested the enforcement of tighter restrictions regarding shareholders in Members Voluntary Liquidation (“MVL”). These restrictions will be introduced as a Targeted Anti-Avoidance Rule.

Income Tax Conditions

As a result of these changes, income tax may be imposed on distributions to individuals made out of the liquidation of a company and in respect of share capital. In order for this imposition of income tax, the following conditions must be met:

  1. The company is a close company;
  2. Within two years of the individual receiving the distribution they become involved with a similar trade or activity; and
  3. The purpose of the winding up can reasonably be assumed to be to obtain a tax advantage.

Entrepreneur’s Relief Conditions

At present, shareholders of closed companies do not need to do a great deal in order to qualify for Entrepreneur’s Relief. As such, they enjoy a low rate of tax, 10%, on receipt of distributions.

The restrictions proposed under the Draft Finance Bill 2016 will make it more challenging to qualify for such relief. Relief will only be granted under the same conditions as those for income tax, the imposition conditions again being as follows:

  1. The company is a close company;
  2. Within two years of the individual receiving the distribution they become involved with a similar trade or activity; and
  3. The purpose of the winding up can reasonably be assumed to be to obtain a tax advantage.

These changes will affect all distributions, not just those post 6 April 2016

The changes will affect all distributions made after 6 April 2016. This does not protect companies who are wound up pre 6 April 2016 as if they still make distributions post 6 April 2016 then the conditions may be imposed on any such distribution.

Only distributions that are made prior to 6 April 2016, not winding up proceedings, will not be effected by the proposed restrictions.

As such, a sooner-rather-than-later approach may be necessary when considering winding up a company via an MVL.

Seeking advice

No certainty has yet been provided as to the finalising of the bill, but 6 April 2016 is set to the be date for changes to apply. However, this is certainly a date to take note of if you are considering winding up your company via an MVL and especially making distributions.

At Franklins we have an experienced and reliable Business Services team who can provide advice on the current circumstances and the potential upcoming changes. If you wish to seek advice on the above, we can ensure that a professional and well informed service is provided. Please feel free to contact me by email or on 01908 660966 for a confidential conversation.

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