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.