Tax tightening for entrepreneurs

In recent years HMRC has introduced a number of new measures to tackle tax avoidance. This trend appears to be continuing with the announcement that rules affecting distributions to individual shareholders from companies in liquidation will be tightened, and a number of further tests will need to be passed for entrepreneurs’ relief to be available.

Effective from 6 April 2016, proposed new legislation included in the Draft Finance Bill 2016 may treat capital distributions from a company in a winding up process as income if all the conditions detailed below are met.

  • An individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding up.
  • Within a period of two years after the distribution, S is involved in or connected to a similar trade or activity to that undertaken by C.
  • The circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage.

These changes may potentially affect all capital distributions from the winding-up of close companies, with the exception of amounts representing the repayment of subscribed capital and distributions of shares or securities in a subsidiary company.

The result of the above is that shareholders may be unable to claim entrepreneurs’ relief on distributions made to them from a winding-up should they continue to, or return to trade in the same industry in the following two year period.

The decision to wind-up a close company where the intention is to distribute the assets to shareholders will need to be considered with greater scrutiny and may not present a better post-tax outcome than other options following the inception of this legislation. However not all companies will be affected by the potential changes to the legislation therefore advice should be sought before contemplating an orderly wind down of a company.

If you have clients who are considering using a solvent liquidation to effect a capital distribution, you may wish to consider bringing the liquidation forward and within this tax year. RSM’s restructuring advisory and tax service lines have the expertise and vast experience in winding down companies in the most tax efficient manner. If this new potential legislation will affect you or any of your clients please contact a member of our team.