Tax changes to Company Dissolutions

Robyn Hughes

This month we expect new legislation to be passed that changes the tax treatment of distributions made before a company is dissolved.

Currently, if a company is not put into formal liquidation, any distribution made to its shareholders in anticipation of being struck off will be taxed as a capital gain, provided the directors and shareholders make certain undertakings to HMRC, such as paying off its creditors (including HMRC!) and not carrying on the trade elsewhere. This has meant that shareholders have had access to potentially paying 10% tax without the need to go through a formal liquidation process.

From 1 March 2012 the rules change and only distributions of up to £25,000 will be treated as capital gains. If distributions exceed £25,000, all distributions will be taxed as income. If the income tax liability is going to significantly exceed the capital gains tax liability then you should consider a formal liquidation which will ensure that capital gains tax is payable on the full amount paid out.

You should also bear in mind that entrepreneurs’ relief may also be available which would reduce the capital gains tax liability to 10% of the gain and would make the capital gains tax ‘option’ much more attractive.

If you are contemplating the end of your company’s life and want to extract the remaining money tax efficiently, now is the time to consider your options and save yourself some tax.

Why not contact me for a confidential chat on 0845 365 1000 or email me at robyn.hughes@hsj.uk.com