The time to act is now!
Are you a non-retiring entrepreneur?
In the Autumn Statement on 25 November 2015, the Chancellor announced changes to the taxation of corporate distributions.
In the consultation document published on 9 December 2015, more details were provided which suggest that in certain circumstances, individuals may not be eligible for capital gains tax treatment on a winding up and therefore not entitled to Entrepreneurs Relief. The rate of tax on some liquidation distributions will therefore increase from 10% to 38.1%
How do I know if I am one of these ‘individuals’?
At present, distributions in a formal winding-up (‘MVL’) are charged to Capital Gains Tax (‘CGT’) in the hands of the individual. The rate of tax may be as low as 10% if Entrepreneurs’ Relief is available or alternatively could be charged up to a maximum of 28%.
Under the new proposals, distributions in some circumstances, will be charged instead as income tax at a rate of up to 38.1%.
If this consultation document becomes law, these changes are likely to apply to distributions made after 5 April 2016 irrespective of whether the liquidation of the company commences before or after this date.
The consultation suggests that the new rules will apply if in particular if the following 3 criteria are met:
- The company is a close company (i.e. controlled by 5 or fewer people) or has been within the previous 2 years.
- If within 2 years after the distribution, the individual (who received the distribution) or a connected party is involved in a business which is carrying on a trade similar to or identical to that of the trade previously carried on by the company or;
- It is reasonable in all the circumstances to assume that one of the main purposes of the liquidation is to avoid tax.
In our opinion, the consultation document is effectively trying to close a relief that is presently available whereby distributions that presently attract Entrepreneurs’ Relief and allow that individual to ‘carry on’ trading in a similar trade, will not be available after 5 April 2016.
To put it in plain English, when an individual sells his company’s business to a competitor and attracts consideration for the same but is expected to work in the consolidated business for a period of time in the future, that person who could presently attract Entrepreneurs’ Relief will be unable to do so if the new rules are implemented.
Considering an MVL?
Act now. Providing the reserves are distributed before 5 April 2016, the new rules will not apply. Now is the time to act.
IRL together with our Tax Consultants will be happy to advise on any situations which involve solvent liquidations.
Other situations in which it might be beneficial to effect a MVL before 5 April 2016 include:
- Incorporated sole traders, typically consultants or contractors, where there are retained profits that would ordinarily have been distributed to the owner in the short term future as dividends or bonuses
- group re-organisations or demergers under s. 110 IA 1986 where there are distributable reserves in subsidiary companies.