Under current legislation, where total distributions in anticipation of informal striking off total £25,000 or more, any such distribution would be treated as income rather than a capital gain. If we look at what this means for tax payers, a basic rate tax payer would pay no further income tax, higher rate tax payers would pay an effective 25% rate and additional rate payers an effective 36.11%, compared to capital gains tax rates of 18% for basic rate and 28% for higher and additional rate. In certain circumstances shareholders may be able to receive funds taxed at 10%, if the capital gain qualifies for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief).
Prior to 01 March 2012, companies could take advantage of an Extra Statutory Concession 16 (ESC 16) which provided that, when a company went down the informal striking off route, distributions to shareholders were treated as capital distributions rather than income distributions, subject to certain conditions.
As of 01 March 2012, the ESC no longer applies. The new legislation provides that capital treatment is only allowed where total distributions of less than £25,000 are made. If distributions of more than £25,000 are made then ALL the distribution is treated as income. The decision to follow an informal striking off route will now require a lot more consideration depending on the amounts left to distribute.
A formal winding up route appears to be the only available solution to shareholders wishing to treat distributions of more than £25,000 as a capital gain. To commence an MVL, it will be necessary for the Directors to produce a Statement of Solvency which will include the estimated realisable value of the company's assets; the liabilities; the estimated cost of the Liquidation process; and the expected return to shareholders.
A Licensed Insolvency Practitioner is required to carry out an MVL and will assist the Directors in producing the Declaration of Solvency; calling the meetings of shareholders; collecting the assets; and distributing them amongst the creditors and shareholders. The main benefit of an MVL can be the tax saving. A basic example of potential tax savings is shown below:
It is easy to see in this example that the shareholder saves over £16,000 of tax.
Apart from the obvious tax savings, an MVL also has the following benefits:
If you are considering winding up a solvent company which has distributable assets over £25,000, advice should be sought from both a tax specialist and a Licensed Insolvency Practitioner.
*Tax allowances subject to change