The Government has already announced in September one of the biggest increases in taxation in recent years, a 1.25% levy on earnings of employees (also paid by employers, so effectively 2.5%). The self-employed will also pay the 1.25% levy, and business owners this will be paid through a corresponding increase in the rate of income tax payable on dividends, amounting to an annual tax increase of £12bn, breaking a manifesto pledge. In March 2020, the Government also reduced the lifetime limit from £10m to £1m for business asset disposals thereafter, significantly limiting the benefit of a lower Capital Gains Tax rate for this relief (10%) on such transactions (compared with the normal rate of 20%).
How will the Government service the debt burden?
Government debt is at levels not seen for 50 years due to the pandemic and there are increasing requests for additional support from energy companies, the NHS, and many other sectors. The Prime Minister and Chancellor are reported to have reached an agreement that any new spending commitments will be funded through corresponding rises in taxation. In addition, there are signs of increasing inflation and interest rates, which will increase the Government’s cost of servicing its debt.
It is therefore not surprising that there is a lot of speculation and suggestions as to how the Chancellor might increase taxes to meet further spending commitments and to repay this excessive debt burden (presumably preferably without breaking further manifesto pledges).
These suggestions include equalisation of capital gains and income tax rates so that capital gains are taxable at 40% or even 45% rather than 20%. If Business Assets Disposal Relief is retained in this situation, an increase above the current tax rate of 10% would also seem likely, perhaps combined with further reduction of the lifetime limit.
Solvent liquidations and the benefit of Business Assets Disposal Relief
For those who have sold their business and / or are holding significant cash sums within a company and comply with other criteria, a solvent liquidation followed by a distribution to shareholders is one way to obtain the benefit of Business Assets Disposal Relief (the gain is, broadly speaking calculated as the difference between the distribution proceeds and the cost of the shares).
It is possible to put a company into solvent liquidation and make a distribution to shareholders very quickly, however, this is not recommended as it takes time to consider and address the many issues involved.
A quick guide to the issues you must consider
- It is advisable to ensure that all assets have been realised and all liabilities paid or dealt with before moving to solvent liquidation - if only because the ownership of assets remaining at dissolution passes to the Crown and creditors are entitled to interest at 8% in a solvent liquidation from the date of liquidation to the date of payment of the claim. Dealing with all assets and liabilities often means that the last assets (or liabilities) to be dealt with are inter-company balances. Tax advice should be taken before considering waiving or not paying any such liabilities, particularly if the debtor and creditor are in different tax jurisdictions.
- It is essential that detailed due diligence is undertaken to identify any banking, compliance and risk, insurance, IT, intellectual property, litigation, property, regulatory, etc issues and deal with these beforehand. An obvious matter to consider is whether the name of the entity has any commercial or other value and requires saving.
- Entities often have “hidden” assets or liabilities which are not shown on their latest balance sheet but can be identified by reviewing the financial statements for the last twelve years, the director and shareholder minutes and other such sources. Again, these assets or liabilities will need to be dealt with before elimination.
- It goes almost without saying that all tax liabilities need to be agreed and settled, the entity deregistered for VAT, the PAYE / NI scheme closed, Corporation Tax, Stamp Duty and all other taxes dealt with, prior to liquidation.
- The return of capital to shareholders in a solvent liquidation may generate a capital gain or loss. The loss may be capable of use in the group to mitigate tax liabilities elsewhere. Tax planning and advice will be needed to mitigate any tax liabilities as far as possible.
It is time to move quickly if you need to liquidate your company and receive a distribution before then (and reduce exposure to any further changes to Capital Gains Tax the Chancellor may introduce).