how will distributions be taxed on winding-up a company?

How will distributions be taxed on winding-up a company?

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An announcement in the Autumn Statement 2015 confirmed that there will be significant changes coming in April 2016 that will impact the taxation of company distributions.

There are a number of ways to close a company and the most common way is to take any remaining profit as dividend. Another tax effective way to close down a company with funds over £25,000 is through a Members Voluntary Liquidation (MVL) where the remaining funds are distributed as capital rather than dividend to the shareholders.

From April 2016, the payment received after closing down of a company will be taxed as income tax at rates ranging up to 38.1% instead of capital gains tax, the rate of which is as low as 10% and a maximum of 28%. The proposal is designed to prevent transactions which are carried out with the main purpose of obtaining a tax advantage.

The conditions under which the distributions will be caught are as follows:

  • A shareholder who receives a distribution is respect of shares during winding-up
  • Within a period of two years after the date of distribution, the individual who receives the distribution continues to be involved in a trade or activity carried on by the company
  • It is clear that one of the main purposes of winding-up is obtaining a tax advantage

The new rule will apply to distributions made after 5th April, 2016 regardless of whether the liquidation commences before or after that date. 

For further information please call Bradleys Contractor tax helpline 0203 507 0022.