Reduction in Capital Gains Tax
Reduction in CGT (Capital Gains Tax) is likely to mean more solvent liquidations in the future.
In the 2016 Budget the Chancellor confirmed that the higher CGT rate has been cut from 28% to 20%. As a result Quantuma believes that it is likely that formal solvent liquidations will be used more and more in terms of tax planning.
Solvent liquidations have been recently utilised to benefit from the shareholders being able to claim Entrepreneurs Relief (“ER”) at a tax rate of 10%.Whilst ER will remain, it is widely expected to be restricted under the Finance Act 2016 and the Targeted Anti-Avoidance Rules (“TAAR”) which will mean that HMRC may not allow ER to be claimed where the applicant is remaining within the same trade for the period of 24 months following receipt of a capital distribution. It is also foreseeable that ER will continue to be restricted.
From April 2016 dividend income taxation will be 32.5 % (£32,000 to £150,000) for the higher rate band and 38.1% for the additional rate band (over £150k). It therefore appears tax efficient to follow a formal solvent liquidation route as a method of extracting cash from a company even if ER does not apply due to the revised 20% CGT which will apply from April. The effect would be that a solvent liquidation process will become an important part in tax planning when dealing with extraction of capital as if there are funds of over £25,000 to be distributed then HMRC specifies that this must be done via a formal liquidation process.