Tax and Liquidations

Increased tax and liquidations

Liquidation is the word used to describe the process by which a company is brought to an end with the assets and property of the company are then “Liquidated” or turned into cash for distribution to creditors. Creditors’ voluntary liquidation is ordinarily the quickest and most efficient way to deal with an insolvent company that has no future and is the most common form of liquidation within the UK.

Previously, it may have been possible for a shareholder to benefit from tax relief following a liquidation. This generally attracts significantly lower tax rates than if a shareholder pays themselves dividends in order to extract assets from the company. However, in the summer budget 2015, the Chancellor announced that the Government would be making major changes to the way that distributions from companies are taxed in the case of voluntary liquidation.

The Changes

HM Revenues & Customs have been seen to be tightening the reins in relation to such tax planning strategies. Specifically, they have been long concerned that these rules have been abused and that voluntary liquidations have been seen as a way of accessing reserves, which would otherwise be payable as dividends and taxed at different rates.

Due to these issues, from 6 April 2016, new tax rules will be introduced to change the way certain capital gains are taxed. Liquidation distributions are to be taxable as dividends, rather than capital receipts. The main area for consideration here is that the implementation of these rules are expected to expose business owners and shareholders to significantly increase taxes on dividends. These changes could see entrepreneurs exposed to tax rates as high as 38.1% albeit where shareholders can show a genuine desire and need to permanently close the company, these changes may not apply.

Changes to tax rules are set to prompt thousands of directors to liquidate their companies in the coming months in an attempt to maximise their return. If you are considering placing your company into liquidation it is important to bear these changes in mind and the implications this may have upon your individual circumstances.

If you would like help or advice on the process of liquidation or the upcoming changes in taxation in respect of the same, please contact our solicitors on 01283 526200.

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