How to get more money in your hands when closing your company down – New rules that could increase your tax liability!

If you want to close your company and distribute the remaining funds to the shareholders, there are a number of ways of doing this so that you end up with more money in your hands.

In most cases you want to treat the final distribution as a capital distribution because generally you will pay tax at either 18% or 28% if you are a higher rate tax payer. In some circumstances you may be taxed at only 10% if you qualify for Entrepreneurs’ Relief.

If the final distribution is treated as income rather than capital, then depending on your personal situation you may well pay a lot more tax!

The 2 main ways of having the company struck off are:

• Informal strike off
• Formal Members Voluntary Liquidation (MVL)

Informal Strike Off

Prior to 1 March 2012 companies could use ESC 16 to informally strike off the company and treat the distribution as capital.

This no longer applies and new legislation only allows companies with a Balance Sheet value of less than £25,000 to be informally struck off and for the distribution to be treated as capital

MVL

If the distribution is more than £25,000 and you want to treat it as capital, then generally you will now need to appointed an Insolvency Practitioner which will involve additional fees. However, the main benefit of a MVL is the likely tax savings

Proposed changes to MVL

In January 2016 HMRC are proposing to change the rules for capital distributions and want to treat them as income from 6 April 2016 where:

• An individual who is a shareholder in a close company receives a distribution in respect of shares in a winding-up from the company
• Within a period of 2 years after the distribution, the shareholder continues to be involved in a similar trade or activity
• The circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage

The possible introduction of these new rules together with the 7.5% tax increase on dividends applying from 6 April 2016 could possibly dramatically increase the amount of tax to pay.

If you wish to discuss the above then please do not hesitate to contact me on kevin@kwaccounting .com and I would be more than happy to discuss the implication for you.