As previously reported, the Government introduced legislation into the Corporation Tax Acts covering the practice previously contained in Extra-Statutory Concession C16 (ESC C16) which took effect on 1 March 2012.
In broad terms, under the new legislation, provided certain conditions are satisfied, where total distributions do not exceed £25,000 such distributions will be treated as a capital receipt in the hands of the shareholder. However, initially it was not clear whether the share capital was to be included in the “total amount of the distributions”. HMRC have now confirmed that it should not and the threshold is to apply only to the distributable reserves.
For example, if a company has share capital of £10,000 and distributable reserves of £20,000, the full £30,000 can be paid by the company without an income tax charge for the shareholder; the £30,000 will be treated as a taxable capital receipt.
The £25,000 limit applies to the total distributions made by the company prior to it being dissolved and is not an amount available for each shareholder. If the final distribution is more than £25,000, HMRC have said all of the distribution (above the share capital subscription element) will be treated as income. Furthermore, reducing distributable reserves to below £25,000, in anticipation of dissolution, may not result in the final distribution being treated as capital.
It is clear that planning distributions where it is intended to wind-up a company requires careful consideration and the tax cost to shareholders requires careful evaluation.