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Solvent liquidations new tax rules

The Government has issued draft legislation for inclusion in the Finance Bill 2016 covering distributions to shareholders in a winding up - Members’ Voluntary Liquidation (MVL).

The proposed new rules

Where the following three conditions are met, distributions to individuals from the liquidation of a company in respect of share capital may be subject to income tax.

  1. The company is a close company.
  2. Within two years after receiving a distribution the person is involved with a similar trade or activity.
  3. It is reasonable to assume that the winding up is to obtain a tax advantage.

Who will this affect?

The new legislation is clearly aimed at serial liquidations, where profits are accumulated, usually for more than 12 months, the company is placed into liquidation enabling shareholders to receive accumulated funds to be taxed as capital, with the potential for also claiming Entrepreneurs’ Relief, and a new company is formed to continue the trade or activity.

The new measures are being introduced as a Targeted Anti-Avoidance Rule (TAAR) and will apply to all distributions from a winding up after 6 April 2016.

Important fact

Worryingly, placing a company into liquidation before 6 April 2016 will not enable shareholders to avoid the new rules unless the distributions are made before 6 April 2016.

If you have clients who have or are planning to place their company into liquidation and are anticipating being involved in the same or similar activity thereafter, they should plan for the proposed changes.

How can we help?

Time is of the essence.

Mercer & Hole’s Restructuring & Insolvency team have considerable experience and a reputation for dealing expertly with a wide variety of restructuring and insolvency and tax related issues. Our approach is always professional and pragmatic.

Should you or your clients require advice, please speak with your usual Mercer & Hole contact or speak with one of the Restructuring & Insolvency team.

 

 

Date: 12th January, 2016
Author: Steve Smith

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