Voluntary Windings Up: Taxation Aspects Background A company may have served its purpose. Common examples would be where a company is selling its trade, or realising its investments. The shareholders would then wish to realise the value of the company in a tax efficient manner. The winding up of a company can be:- Formal more expensive and carried out by a liquidator, or Informal less expensive and may give a different tax treatment. Taxation overview The taxation aspects may be considered at two levels:- Tax within the company; and Tax on the shareholders. The winding up of the company will usually involve the sale of its assets, although it is possible to transfer assets in specie. The gains and losses arising from these realisations will be included in the corporation tax computation for the period of cessation. The value of the company can be passed to shareholders in either (or both) of the following ways:- Income payments as dividends prior to winding up; Capital or income payments during the winding up. Tax within the company In the period approaching a winding up, the company is likely to sell off its trading or investment assets. It may therefore make exceptional capital or income gains or losses. Advance planning could minimise the overall tax payable by the company. Aspects that may be relevant include:- Rules relating to accounting periods; Close Investment Holding Company rules; and Accounting for expenses. Accounting periods Points to note about accounting periods include:- The cessation of the trade of a company is deemed for tax purposes to bring an accounting period to an end, even though the company may draw up accounts to its usual annual accounting reference date. This can mean that where a company sells its main trading assets at the beginning of its financial period, it may be taxed at a higher than expected rate. For instance, if a trade ceases after only one month of an accounting period, the small profits rate of 20% is available for profits of up to only one-twelfth of the annual threshold of 300,000, i.e. 25,000. Therefore, taxable income or gains in the month of cessation exceeding 25,000 will be subject to corporation tax at the full rate of 21% (from 1 April 2014). Pension payments are deductible for tax purposes in the accounting period in which they are paid. Therefore, any pension payments made after a cessation of trade may not be capable of being offset in the expected way against, for example, gains on any asset sales made prior to cessation.
Close Investment Holding Company rules Points to note about the close investment holding company rules include:- Broadly, the effect of the Close Investment Holding Company (CIHC) rules is to deny the benefit of the small profits rate of 20% to family companies that do not mainly carry on a trade or certain investment activities. Instead, CIHCs pay corporation tax at the full rate on all profits (being 21% from 1 April 2014). The winding up of a non-cihc can bring the CIHC rules into operation and unexpectedly increase the rate of tax payable in final periods. Accounting for expenses The accounts of a company, especially one that previously carried on a trade, should be carefully drawn up to include provisions for all expenses relating to the cessation. Without such provisions, appropriate tax relief may not be obtained on final expenses relating to the trade. Tax on shareholders: basic aspects Dividends paid prior to the start of the winding up are taxed in the same way as any other dividends. Accordingly:- individuals who are non-taxpayers or who are liable to tax at basic rate have no further liability. individuals who are generally liable to tax at 40% on non-dividend income are liable to tax at 25% on net dividends. individuals who are generally liable to tax at 45% on non-dividend income are liable to tax at 30.56% on net dividends. Dividends cannot be paid once a formal winding-up starts. Capital payments made during the course of a formal winding up are treated as part disposals of the shares in the company and are liable to capital gains tax. The rate of capital gains tax depends on a wide range of circumstances. These include the availability to the shareholders of their capital gains tax annual exemption, capital losses and Entrepreneurs Relief (ER). Generally, the effective rate will be 28%, except where the conditions for ER are met. The first 10m (on a cumulative basis from 6 April 2008) of gains attracting ER will be taxed at 10%. The tax position on an informal winding up using the rules under the Enactment of Extra Statutory Concessions Order (EESCO) detailed in the Appendix, may be summarised as follows:- where the total distributions do not exceed 25,000 they will be treated as being capital, with the tax treatment outlined above. where the total distributions exceed 25,000, they will be treated as dividends, except to the extent that they relate to the repayment of share capital, in which case they are treated as capital. It is understood that the 25,000 limit relates to the level of reserves, and that there is no limit to the amount of share capital that can be repaid by this process. Tax on shareholders: planning aspects Planning for the tax on shareholders can include taking into account the following points:- Timing of payments; Gifts to spouses; and Gifts to others.
Timing of payments Points to note about the timing of dividend and capital payments include:- Spreading the payment of pre-winding up dividends across two tax years to reduce any liability to higher rate tax. Spreading capital payments across two tax years to reduce the capital gains tax payable, by allowing for further capital gains tax annual exemptions. Gifts to spouses Points to note about gifts to spouses include:- Gifts to spouses, either prior to the payment of dividends or prior to the start of the winding up of the company, may reduce the tax payable on these payments. The gifts must be outright gifts, with the recipient spouse not being under any obligation to transfer any proceeds back to the original owner. Gifts to others Points to note about gifts to others include:- Dividends and capital payments may be liable to less tax if shares are gifted to others. However, gifts to others could themselves lead to capital gains tax liabilities. As a result it may be important to make the gifts when a company is still trading, so that holdover relief is available. Reduction of capital It is straightforward for a company to reduce its share capital. In some situations it will be helpful to repay most of its share capital (which will be treated for tax purposes as capital, not dividend) if this would then allow the company to be wound up using the EESCO provisions, with total distributions of 25,000 or less. However, on the basis of the understanding outlined above, this step would not strictly be needed. Bona vacantia Bona vacantia is the term used for unclaimed assets. Under general law bona vacantia falls to the Crown. Bona vacantia is dealt with by:- The Treasury Solicitor s Office and the Duchies of Cornwall and Lancaster, in England, The Queen s and Lord Treasurer s Rembrancer in Scotland. The following summarises the position as regards the dissolution of companies and bona vacantia:- Any assets remaining after the dissolution of a company fall to the Crown as bona vacantia, under the Companies Act 2006 s1012. Technically, it is not possible to distribute amounts representing share capital (except under a formal winding up). Accordingly, after dissolution any such amounts could theoretically be reclaimed by the Crown as bona vacantia. However, the Treasury Solicitor s Office has confirmed that the Crown will not seek to recover any share capital distributed before a dissolution. Further, this assurance applies irrespective of the amount of share capital involved. Accordingly the bona vacantia rules will only be of concern if the company is dissolved before it has distributed all of its assets. Conclusion Tax planning, from both a company and shareholder perspective, can maximise the after tax proceeds on a voluntary winding up. Updated February 2014
Legislation Enactment of Extra Statutory Concessions Order 2012, paras 16-18. This inform is designed to give a brief summary of relevant rules, as known at the date of issue. French Duncan can accept no responsibility for any loss arising to any person acting or refraining from action as a result of this inform. Advice should be sought in relation to individual circumstances.
APPENDIX EESCO rules The tax rules outlined below, where they apply, take distributions outside the normal charge to tax as income payments, leaving them subject to capital gains tax. The rules apply where:- The company has made, or intends to make, an application to be struck off the Companies House Register, or The Registrar has commenced the striking off of the company to distributions made in respect of share capital in anticipation of the dissolution of the company. The conditions for the rules to apply are:- The distribution, or the total of the distributions, does not exceed 25,000, and The company intends to satisfy its creditors and recover its debts. The tax treatment is reversed back to income payments if within two years of a distribution the company has not satisfied its creditors, collected as far as is reasonably practicable its debts, and been dissolved. Notes Some points to note are:- These rules apply to distributions made on or after 1 March 2012. There is no requirement for any clearance from HMRC. The rules apply automatically, where the conditions are met. If the tax treatment as capital is not wanted, then the distributions should be appropriately described in Board minutes and made before the dissolution process is started. It is understood that amounts which represent the repayment of share capital are not distributions for this purpose, and so do not count towards the 25,000 limit. The rules apply only where the total distributions are 25,000, or less. The rules do not apply where the distributions total more than 25,000; nor in such a case do they apply to the first 25,000 of distributions. The rules make no specific mention of distributions in specie. For such distributions, there would be valuation aspects to consider.