Insolvency practitioner warns over tax increases in solvent liquidations

New rules regarding Entrepreneurs Relief are coming into effect from 6th April 2016 which will impact capital distributions received in the solvent liquidation of a company where the individual shareholder is involved in a similar company after the distribution.

Keith Anderson, of Glasgow-based financial restructuring, recovery and insolvency boutique mlm Solutions, has warned that the clock is now ticking for companies and individuals seeking to wind up their business, and save up to 35 per cent tax, before the new rules come into force.

At present Entrepreneurs Relief reduces Capital Gains Tax to 10 per cent (rather than the normal rates of 18 per cent or 28 per cent) on gains arising on the disposal of qualifying assets up to a lifetime limit of £10 million. In order to qualify an individual must hold at least 5 per cent of the shares and be employed by, or an officer of, the company.

The company must be a trading company (or the holding company of a trading group) with the foregoing conditions met throughout the 12 month period prior to the date of disposal. This will also apply where the company ceases to be a trading company and that date of cessation is within 3 years of the date of the disposal.

The changes will restrict the eligibility of taxpayers to receive Entrepreneurs Relief on capital distributions received in the liquidation of a company.

Mr Anderson said: “The new rules are aimed primarily at phoenix style arrangements and, for the first time, distributions in a liquidation will come into the tax definition of transaction in securities which allows HMRC to replace capital with income. In short, the distribution will be taxed as income rather than as a capital gain.”

It is believed the rules will apply to qualifying individuals who are involved in the same or a similar trade within two years of the distribution.

If the distribution is taxed as income rather than a capital gain an individual may be liable to pay up to 45 per cent in tax depending on their personal circumstances.

“Companies considering winding up are running out of time to implement a Members Voluntary Liquidation (MVL) which will provide valuable tax relief in advance of the changes. The MVL process, including the distribution to shareholders, must be completed before 5 April to benefit from the favourable Capital Gains Tax rate,” added Mr Anderson.

MVLs are not all about securing a tax efficient process to distribute capital in a company. The other principle advantages are to ensure distributions cannot be challenged and to mitigate risk for the directors. Without going through an MVL process directors are not released from their potential liabilities to the company and can be held personally responsible in certain circumstances for discharging the company’s debts.