Once a company has reached the end of its useful life its shareholders may place it in liquidation and extract any assets after payment of creditors by way of liquidation distribution.

Until 6 April 2016 a straightforward liquidation of a company was outside the scope of the income tax anti-avoidance legislation applying to “transactions in securities” and hence shareholders were effectively guaranteed CGT treatment on their liquidation distributions.

This was beneficial for the shareholders who could pay CGT at rates of as low as 10% on their liquidation distributions, where Entrepreneurs’ Relief applied.  This 10% CGT rate compares very  favourably with income tax rates on dividends of as high as 38.1%.


New Targeted Anti-Avoidance Rule (“TAAR”)  

The Government became concerned that the practice of “phoenixism” and the use of special purpose companies for a single contract or project were becoming increasingly prevalent and were motivated by income tax avoidance considerations.

Consequently, the Government introduced a new TAAR which came into force on 6 April 2016.  The TAAR gives HMRC the power to recategorize distributions received in a winding up as dividend income subject to income tax where certain conditions are met.


Conditions for the TAAR to apply

In essence, a distribution made to an individual on or after 6 April 2016 in the course of the liquidation of a company can now be treated as dividend income and subject to income tax at rates of up to 38.1% where the following conditions are met: -

• The individual receiving the distribution has at least a 5% interest in the company;

• The company is a close company when it is wound up (NB most private companies will be close companies);

• The individual carries on similar activities to the company within two years of receiving the distribution. This could be as sole trader, partner or shareholder in another company;

• It is reasonable to assume that the main purpose or one of the main purposes of the liquidation of the company is income tax avoidance.  


Action required

HMRC’s published guidance on the TAAR is (deliberately?) brief.  Moreover, no advance tax clearance procedure is available for the TAAR.

Given this uncertainty, shareholders contemplating a liquidation of their company are strongly recommended to take advice on whether any liquidation distributions will benefit from CGT treatment or could be taxed as dividend income under the TAAR.   


By Sheldon Cole, Partner

For more advice on this please do not hesitate to contact me