New rules now in force could significantly increase the amount of tax payable by shareholders when a company is wound up by way of a Members' Voluntary Liquidation.
Previously, a Members' Voluntary Liquidation allowed individual shareholders to receive a distribution in a winding up at the same rate of tax as Capital Gains Tax, which can be reduced to as little as 10% if entrepreneurs' relief can be applied. However the Government wants to tackle the practice of using liquidations as a way of taking money out of a company at lower tax rates, rather than paying a dividend - on which income tax rates have increased. The new rules mean distributions will generally be subject to income tax, with basic rate taxpayers paying 7.5%, rising to 32.5% for higher rate taxpayers and 38.1% for those in the additional rate band.
The situations under which the rules apply are broadly as follows:
1 - 'Moneyboxing' - where a company retains profits in excess of its commercial needs so that shareholders only receive them when the company is eventually liquidated.
2 - 'Phoenixism' - where a new company is set up to carry on substantially the same activities in substantially the same ownership and the old company is liquidated to extract the value in a capital form.
3 - 'Special Purpose Companies' - where the operations of a business are capable of being divided among separate companies, each undertaking a particular project. As each project or contract comes to an end, the company is liquidated and the profits and gains of that project are realised in a capital rather than income form.
A common example of this third condition is a Special Purpose Company set up for property development, with the company liquidated as the project ends and the profits and gains realized as capital rather than income. Another company is set up for the next project and is then wound up on completion, and so on.
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