Could you save tax on closing down your company?

Liquidators are rubbing their hands together following proposed new legislation dealing with distributions paid from a company to shareholders upon a company dissolution.

Current HMRC practice under ESC C16, a 25 year-old statutory concession dealing with distributions on a striking off, enables amounts paid to shareholders to be treated as capital rather than as income, where conditions are met.

In short, when a company comes to the end of its useful life, a liquidation, followed by the division of assets amongst the shareholders, will be subject to capital gains tax (CGT). With the difference between income tax and capital gains tax rates currently so large, this represents a very tax-efficient way of winding up a company’s affairs. The availability of the annual CGT exemption, as well as the possibility of Entrepreneurs Relief reducing the headline rate to 10% (rather than a possible 36.1% if income treatment is applied) adds to the attraction. The cost of formally appointing a liquidator is also saved.

The proposed legislation, part of an ongoing process to put HMRC concessions on a statutory footing, limits the amount that can be paid and treated as capital on a winding up to £4,000. Where more significant amounts are involved and capital treatment is preferred, it will be necessary to appoint a liquidator to wind up the company, meaning greater administration costs and a delay in the process.

The change would appear to be a boon for liquidators. Owner-managers considering a wind up of their company may want to take action before the final legislation is enacted.

If you are considering closing down your company, please contact us for specialist advice.