As you may be aware, new rules are being introduced with effect from April 2016 as part of the Finance Act 2016. These relate to distributions in a winding-up/liquidation and are designed to target certain company distributions in respect of share capital in a winding-up. Where a distribution from a winding-up is caught, it is chargeable to income tax rather than capital gains tax.
The rules apply where the following conditions are met:
- The company being wound up was a close company (or was within the two years prior to winding-up)
- The individual held at least a 5% interest in the company (ordinary share capital and voting rights).
- The individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution
- It is reasonable to assume, having regard to all of the circumstances that there is a main purpose of obtaining a tax advantage.
Whether or not Conditions C or D are triggered could be a cause for some contention, and so HMRC note that they have received a number of clearance applications relating to these new rules.
In the absence of a statutory clearance procedure under the new legislation, HMRC have clarified that it is not their general practice to offer clearances on recently introduced legislation with a purpose test. They have instead sent out a standard reply providing some examples of how they think the rules will apply.
Clearly this is a developing area and HMRC’s reaction is somewhat disappointing as taxpayers often require certainty before carrying out commercial transactions which could be caught. HMRC have stated that further guidance will be published, however in the meantime we advise that care be taken, and seeking professional advice, as always, may save time and costs in the long run.
We would be delighted to assist if you think you may be affected by these rules and have any queries.
Two changes were announced in the Autumn Statement to the treatment of goodwill on incorporation, which had immediate effect from 3 December 2014.
These were as follows:
- Entrepreneurs’ Relief is no longer available on a sale of the goodwill to a connected party
- Tax relief on writing off the goodwill (amortisation) can no longer be obtained once in the company.
Both of these changes will reduce the attractiveness of common planning which was undertaken when incorporating a business, but there are still options available to avoid tax becoming a drawback on incorporation.
The use of TCGA 1992, s.162 incorporation relief, in combination with s.165 gift relief where suitable, is still possible in order to avoid upfront capital gains on incorporation.
It should also be noted that the new restrictions only apply where the parties are connected, and there could therefore be situations where suitable planning could be undertaken to prevent the rules from applying. Similarly, in cases of a management or third-party buy-out, these new restrictions should not apply.
With further tightening of the rules, it will be more important than ever to ensure suitable professional advice is sought before undertaking an incorporation as careful structuring will be needed to avoid unexpected outcomes.
Following the change to the CGT rate in June 2010, the rules for claiming Entrepreneurs’ Relief (ER) were changed so that relief is now given as a 10% tax rate, rather than the previous subtly different mechanism of reducing the gain but applying the normal rate of CGT.
In certain circumstances it may be possible to achieve an effective tax rate of 5.6% on cashing the loan notes or to receive additional ER where the lifetime limit was previously breached (but there is now some available due to the increase of lifetime gains to £10million).
If you or your clients have QCBs issued between April 2008 and June 2010, please get in contact with Eaves and Co Specialist Tax Advisors, Leeds and Southport to see if we can help.
We have recently been dealing with a project in our Leeds office involving a company restructuring. The client was required to reduce his shareholding in the company as part of the arrangement for a seperate sale of shares in another company.
The situation was complicated by the fact that the company’s other shareholder did not want to obtain outright control of the company.
We proposed a restructuring that would enable the shareholdings to be equalised at 50:50 between the shareholders, thus achieving the desired reduction and commercial objectives. Importantly, we received clearance from HM Revenue & Customs for the proposed transactions and as such they should be achievable at a very low rate of tax with a significant saving over any other options for restructuring.
Eaves and Co Specialist Tax Advisors can help you with advice tailored to your specific needs.