The way in which you are taxed when you sell or wind up your company is about to become a lot more complicated… Charlie Burton outlines the implications.
The Finance Bill 2016 may herald a shock for business owners, as it introduces new legislation that will impact on the sale or winding up of a company.
Generally, shareholder/ directors pay themselves a combination of salary and dividends, and then receive a capital payment when the business is sold or wound up. This capital payment is subject to capital gains tax (“CGT”) at 10% and 20%, much lower rates than the current income tax rates of up to 45%.
Furthermore, there is also the opportunity to claim entrepreneurs’ relief, provided that certain conditions are met. A successful entrepreneurs’ relief claim can result in capital gains being taxed at a reduced rate of 10% (up to a lifetime limit of £10 million).
However, the government has become increasingly concerned that the existing rules are being used to secure a capital payment (and to benefit from a lower rate of tax) where it is not justified. New anti-avoidance legislation has therefore been introduced in the Finance Bill 2016 that will target transactions of which the main purpose, or one of the main purposes, is to obtain a tax advantage.
In particular, the new legislation is designed to combat “phoenixing”, where a shareholder receives a capital payment from a company on a winding up and, within two years, becomes involved in a similar trade or activity.
Other arrangements that may be caught include situations where a shareholder accumulates profits in a company, in excess of its commercial requirements, with a view to receiving a capital payment when the company is eventually sold or wound up.
Where the anti-avoidance legislation applies, capital payments will be reclassified as income distributions (i.e. dividends) and subjected to income tax as opposed to CGT.
The changes are unlikely to impact on bona fide transactions. However the rules are complex and have been widely drawn. If you are contemplating a transaction involving your company’s shares, and require further advice, please contact Charlie Burton at firstname.lastname@example.org or on 0191 281 1292.