Cash extracted from wound-up firms to be taxed as income
Next year's Finance Bill will impose an income tax charge on owners of close companies who liquidate the company in order to share out its assets.
At the moment, distributions on liquidation and similar events are taxed as capital gains rather than income. HM Treasury considers this is being exploited by owners to avoid tax on dividends. There is already some targeted anti-avoidance legislation to prevent this, but it does not apply in all circumstances.
The new measure, to be introduced on 6 April 2016, will charge income tax rates up to 38.1 per cent on capital distributions made from that date in some common circumstances. As well as voluntary liquidations, these include certain disposals of shares to a connected third party, and a purchase of own shares where the seller retains a significant interest in the company.
The charge will apply if three conditions are met:
- the company is closely held or has recently been so;
- the individual receiving the distribution continues to carry on some or all of the company's trade through another vehicle (a 'phoenix');
- tax avoidance is one of the main purposes of the liquidation.
The income tax charge will be waived if the amount distributed is less than the amount originally subscribed for the shares, or if it is itself a shareholding in a subsidiary company. However a capital gains tax charge may still arise.
This controversial proposal is likely to cause a stir among many company owners and advisors, says tax consultant Nichola Ross Martin. 'Apparently, the only way that HMRC think that you may exit is via a share sale', she says. 'Even then the new measures may still target you, though if you are non-domiciled or prepared to move abroad you may avoid the problems.'
The consultation on the proposed new rules runs until 3 February 2016.
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