Distributions in a (solvent) winding up

As you may already know, HMRC intend to fundamentally reform the manner in which dividends and other company distributions are taxed for individuals, in pursuit of those members of the business community who have sought to structure their financial affairs in order to pay less tax.

Interestingly, HMRC see this as a behavioural problem. And to eliminate the targeted tax leakage, the amendments seek to address matters by way of introducing two measures that reduce the incentive to convert income into capital and so increase the tax take.

These measures will potentially affect the following:

  • Transactions concerning the sale of shares
  • Repayment of share capital
  • A company purchasing its own shares
  • Distributions in a winding up

The area that we are involved with regularly is that of making distributions in a (solvent) winding up.

The proposed targeted anti-avoidance rule would treat a distribution after 6 April 2016 from a liquidation as an income distribution where:

  • An individual receives a distribution from the winding up of a close company in respect of shares held
  • Within 2 years the individual continues to be involved in a similar trade or activity
  • A main purpose of these (entire) arrangements is to gain a tax advantage

In view of the above, many accountants and advisors are now considering the implications of these changes with their clients, that may prompt directors to accelerate any previous intention they may have had to complete a solvent winding up process in the future.

Should your client wish to consider a solvent winding up process in view of the changes noted above, please do get in touch as soon as possible as capital distributions will likely need to be made before the 6th April 2016 deadline, subject to the usual tax clearances.