Just prior to the Christmas break, HMRC released draft legislation that they will look to include within the 2016 Finance Bill. Amongst the 645 pages is a new piece of anti-avoidance legislation that is a real nasty!
Currently, if you wind a company up through which you have run a business, you will normally benefit from capital gains tax treatment on any gain that you make. This is good news as capital gains tax rates are lower than income tax rates. In fact the difference can be substantial where entrepreneurs’ relief applies as this reduces the rate of tax to just 10% where the highest rate applicable to dividends will soon be 38.1%.
If your business has come to an end and you are simply winding the company up to go and do something completely different, then you are unlikely to be affected by the new anti-avoidance rules. However, many businesses are structured to take advantage of the significant tax saving and as a result of the new legislation may lose out if they do not act before 31 March 2016.
The new anti-avoidance rule states that instead of paying capital gains tax you will pay income tax on any distribution received from a company being wound up where the following three conditions apply:
- the company is a close company when it is wound up (almost all companies are close companies);
- within 2 years following the date that a distribution is made as part of a liquidation, the shareholder (or a person connected with them) carries on the same or a similar trade as that which was carried on by the company in any capacity (personal, partnership, company); and
- it is reasonable to assume, taking account of all the facts, that the main purpose (or one of the main purposes) of the winding up was to avoid or reduce a charge to income tax.
It is impossible to go into any real detail here as this legislation whilst not complex has far reaching implications. However, we should highlight a few very important points:
- The law only takes effect for distributions that happen after 6 April 2016. So if you were to wind up a company now and make all distributions prior to that date you would not have to consider the new legislation at all.
- As with all such liquidations, you would still need to consider current anti-avoidance legislation known as the “transactions in securities” legislation. Whilst this is widely considered to be somewhat unwieldy in attacking a phoenix it must still be considered in full.
- Just because you have considered benefiting from the reduced rate of capital gains tax does not necessarily mean that you will fall foul of the new legislation. However, even greater care will need to be exercised when pursuing a winding up of the company taking account of this new legislation.
- We are sceptical as to whether the new legislation will punish those that operate similar businesses through special purpose vehicles (SPVs) where there are strong commercial reasons for so doing. A common example being property development companies where the SPV is wound up once the property has been sold.
Fortunately we are extremely well placed to help you through the changes as we not only have significant expertise in tax planning but also benefit from having our own internal corporate recovery and insolvency team. Together we can advise on the most appropriate strategy not only to take advantage of the current rules but also to plan for the future.
For further information, contact the author as below.