Liquidations and other Capital Payments may be subject to income tax

One of the anti-avoidance measures announced in the Autumn Statement on 25 November was to introduce legislation to counter the distribution of income accumulated in a company to the shareholders in a capital form, potentially subject to the 10% capital gains tax rate with the benefit of entrepreneurs’ relief. This is a much lower rate than the rate of income tax on dividend payments, particularly when the new higher dividend tax rates are introduced in 2016/17.

The anti-avoidance legislation is now included in the draft clauses to be included in Finance Bill 2016 and, if enacted, will apply from 6 April 2016. The proposed changes appear to go much further than we originally thought and potentially catch schemes of capital reduction and even certain situations where a company buys back shares from a shareholder. It is hoped that the changes will not apply to genuine commercial transactions.

If you are considering closing your company down and distributing the retained profits it may be advantageous to do so before 6 April 2016. If so, you should contact us as soon as possible so that the transaction can be completed before the new rules take effect.