Up until 6 April last year, the distribution of cash to shareholders on the winding up of a trading company by a liquidator, was usually taxed as a capital gain, potentially taxed at just 10% with the benefit of entrepreneurs’ relief.
However, last year’s Finance Act introduced a targeted anti-avoidance rule that may tax such a distribution as a dividend at income tax rates up to 38.1% under certain circumstances.
HMRC have issued guidance in an attempt to clarify when the new anti-avoidance rule would apply.
Broadly the anti-avoidance is intended to catch situations where the old company is wound up and a similar business is carried on by a connected business. Note however, the distribution would only be taxed as a dividend at income tax rates if one of the main purposes of the transaction was to avoid tax. This is a complex area so please contact us to discuss your plans so you do not fall foul of the new anti-avoidance rule when winding up a company with significant cash reserves.
As with all of our tax tips and web pages this information is necessarily summarised and of a general nature. If you would like detailed specific advice please contact us.