Newsletter Spring 2016

Extracting capital from your company

What are you going to do with your company? When you have finished trading, will you sell it on, or liquidate it to extract the capital? The proceeds in either case are treated as a capital gain, which is taxed at 10% if entrepreneurs' relief applies.

This is a very low rate of tax. Some people are tempted to set up a company, trade for a few years and then liquidate the company, with the objective of paying only 10% on all the profits held within the company. Then they repeat the process with a new company.

There are already tax avoidance rules which HMRC can deploy against people who use such 'phoenixing' tactics, but those rules are about to be toughened.

From 6 April 2016 it is proposed that the proceeds from the liquidation may be taxed as dividends rather than as Capital Gains. Dividends are subject to higher tax rates from that date, of: 7.5%, 32.5% or 38.1% (depending on the level of your other income), with the first £5,000 per person tax-free.

The tough new rules will apply where the shareholder is trying to save tax by liquidating their company, and starts up another business in a similar trade within two years of the liquidation. The new business may be a company, sole-trader or partnership. This will apply even if the scale of the business is much diminished, or run by a close relative.

If you are thinking of liquidating your company, that liquidation must be completed before 6 April 2016 to avoid the new rules. Liquidations can take many months, so you need to act fast.

Where you opt for the cheaper and quicker option of striking off rather than liquidation, the proceeds will be taxed as if they were dividends, where the total exceeds £25,000.

Let's talk about the plans for your company before the new rules come into effect.