Under current legislation, where distributions in anticipation of informal striking off total £25,000 or more, any such distribution would be treated as income rather than a capital gain.
If we look what this means for tax payers; a basic rate tax payer would pay no further income tax; higher rate tax payers would pay an effective 25% rate and additional rate payers an effective 36.11%, compared to capital gains tax rates of 18% for basic rate and 28% for higher and additional rate.
In certain circumstances shareholders may be able to receive funds taxed at 10%, if the capital gain qualifies for Entrepreneurs’ Relief.
Prior to 01 March 2012, companies could take advantage of ESC (16) which provided that when a company went down the informal striking off route, distributions to shareholders were treated as capital distributions rather than income distributions, subject to certain conditions.
As of 01 March 2012, the ESC no longer applies. The new legislation provides that capital treatment is only allowed where total distributions of less than £25,000 are made.
If distributions of more than £25,000 are made then ALL the distribution is treated as income.
The decision to follow an informal striking off route will now require a lot more consideration depending on the amounts left to distribute.
Members Voluntary Liquidation (MVL)
A formal winding up route appears to be the only available solution to shareholders wishing to treat distributions of more than £25,000 as a capital gain.
To commence an MVL, it will be necessary for the Directors to produce a Statement of Solvency which will include the estimated realisable value of the company's assets, the liabilities, the estimated cost of the Liquidation process and the expected return to shareholders. In practice, a Licenced Insolvency Practitioner (IP) is instructed to assist with this document.
The Company is placed into Liquidation at a meeting of shareholders. It is essential for the Liquidator to be a Licenced Insolvency Practitioner. It is his job to collect the assets and distribute them amongst the creditors and shareholders.
The Liquidator will also advertise for all creditors to prove their claim within the Liquidation to ensure that 'notice to the world' has been given. This is important where there may be contingent creditors, such as claims for future damages. For example, asbestos claims.
The main benefit of an MVL can be the tax saving. Examples of potential tax savings are shown below:
The 100% individual shareholder of Company A Ltd has decided to cease trading, call in debts and wind up the company. The assets consist of cash £10,000, stock £8,000, machinery £3,000, and debtors £4,000, with monies owed £2,000. The cost of the shares on incorporation 10 years ago was £1,000.
Under the striking off route, the total distribution will be £23,000, which is less than £25,000, and therefore capital treatment may apply.
The capital gains tax with Entrepreneurs Relief would be £(23,000 - 1,000) less annual exemption of £11,100 (tax year 15/16) at 10% = £1,090.
If a liquidator is appointed to formally wind up under an MVL, the tax treatment will be the same.
Company B Ltd is selling its trade and assets for £100,000. Corporation tax on the sale of the assets and all other liabilities have been settled. The cost of the shares on incorporation 10 years ago was £1,000.
Under the striking off route, the total distribution will be £100,000, which is greater than £25,000, and therefore income treatment will apply.
In an informal striking off, assuming the 100% shareholder is a higher rate taxpayer, income tax will be due at a minimum effective rate of 25% on £(100,000 - 1,000) = £24,750.
If a liquidator is appointed to formally wind up under an MVL, then capital treatment would apply. The capital gains tax with Entrepreneurs Relief would be 10% on £(100,000 - 1,000) less annual exemption of £11,100 at 10% = £8,790.
In addition to the obvious potential tax savings in an MVL, the process offers a greater degree of protection from contingent creditors and brings the affairs of the company to a neat end, giving directors peace of mind.
If your client is considering winding up a Company which has distributable assets, early advice is required from a Licensed Insolvency Practitioner who will be pleased to work with your tax department to assist in the process. For more information, please contact Jon Mitchell on 01392 288555 or by email: firstname.lastname@example.org
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