NEW INFORMAL LIQUIDATION RULES (ESC C16) CONFIRMED

As we trailed back in December, legislation has now been passed to change the tax treatment of distributions made prior to companies being struck off. Currently, If a company is not put into formal liquidation, any distribution made to its shareholders in anticipation of being struck off will be taxed as a capital gain, provided the directors and shareholders make certain undertakings to HMRC, such as paying off its creditors (including HMRC!) and not carrying on the trade elsewhere. This has meant that shareholders have had access to potentially paying 10% tax without the need to go through a formal liquidation process.

Well from 1 March 2012 the rules will be changing. From that date, only distributions of up to £25,000 will be treated as capital gains. If distributions exceed £25,000, all distributions will be taxed as income. Therefore only shareholders in fairly small companies will be able to continue to benefit from Capital Gains Tax rates. Should you be contemplating the end of your company's life and extracting the remaining money, now is the time to consider your options. HMRC have confirmed that provided both a valid application is made and the distributions are paid before the end of February, the fact that HMRC may not have replied to the application will not prevent the current rules applying.

If you want to take advantage of the existing rules this month, please get in touch with your usual Davies Mayers Barnett contact or Richard Lupson-Darnell.