If your client is in the process of closing down their company, or are thinking of doing so, they need to know about the change in the tax law from 1 March 2012.
If your clients company contains significant value, they will want to extract the cash and assets in the most tax efficient manner. Until now your client could ask the Taxman to apply concession C16 to the payments made during an informal winding-up up of the company. Concession C16 allows the payments made to shareholders (known as distributions) to be taxed as capital gains. Shareholders who were also officers or employees of the company may be able to claim entrepreneurs' relief on those gains, which means the gain is taxed at just 10%.
Concession C16 is generally granted when the company has paid all its creditors, including the Taxman, and the owners promise not to start-up the same business in a different company. Concession C16 will cease to apply from 1 March 2012, and will be replaced by a new law as follows:
- Where the distributions are more than £25,000 in total, all those distributions will be subject to income tax (at rates of 25% or 36.11%), in the hands of the shareholders.
- Where the total value of the distributions to the shareholders of the company is no more than £25,000, the entire amount will be taxed as capital gains (at 10% where entrepreneurs' relief applies, or at 18% or 28% otherwise).
- Payments made as part of an informal winding-up on or after 1 March 2012, will be subject to the new law even if permission to use concession C16 was previously given.
- It doesn't matter on what date the company is finally dissolved or struck-off, it is the date on which the distribution is made that counts.
If your clients company holds significant value and they want to close it down, they can opt to use a formal liquidation. This will allow all the distributions to be treated as capital gains and for the lower tax rates to apply. However, a registered liquidator may charge a fee of £5000 or more to undertake the liquidation.
