HMRC has announced that it is to an impose a Capital Gains Tax ceiling on the amount of capital that can be distributed to shareholders when a limited company is wound up, before income tax is applied.
The changes to the (ESC) C16 rules, mean that from 1st March 2012, only the first £25,000 of a final capital distribution to shareholders is subject to Capital Gains Tax. Anything above this amount will be taxed as it it were income.
The Extra-Statutory Concession C16 rules were implemented to simplify the procedure for winding up a limited company. Under (ESC) C16, instead of appointing a liquidator to dissolve a limited company, the company directors can manage the company’s closure themselves. After paying off all their creditors, any remaining company funds can be distributed to shareholders.
Unlike dividends, capital distributions made upon a company closure are not subject to income tax, and many shareholders will be eligible to claim Entrepreneurs’ Relief on the proceeds – paying a mere 10% compared to the standard 18% or 28% Capital Gains Tax rates.
The current rules do provide a tax advantage to shareholders when a company is wound up, but it also provides protection to creditors – including HMRC. If a liquidator is appointed to dissolve a company, this will involve significant extra costs and time outlay, and some creditors may end up out of pocket.
As part of its ongoing task to target possible tax avoidance, HMRC has decided to impose a £25,000 ceiling on the total capital distribution to shareholders which can be subject to Capital Gains Tax. Any proceeds greater than this sum will be subject to standard income taxation. The £25,000 limit, which is due to take effect from 1st March 2012, applies to the total distribution, and is not a ceiling for individual shareholders.
Clearly, if you are thinking about closing your limited company, you should consult your accountant, if you want to take advantage of the current (ESC) C16 ceiling before the limit is imposed in March 2012.