We have been eagerly awaiting clarity from HMRC on the ‘new’ targeted anti-avoidance rules in relation to the tax on distributions from liquidations. The legislation is very wide-ranging and seems to suggest that (broadly) if a shareholder has any involvement in similar activities to the company being liquidated within two years of the liquidation, then any distribution will be taxed as a dividend (to the extent that it exceeds the original base cost of the shares).
It has to be said that the long awaited guidance from HMRC is very disappointing. It fails to address the kinds of areas that shareholders and advisors were seeking guidance on. For example there had been speculation that the new rules would not apply in practice to property developers who liquidate at the end of a particular project. The guidance fails to address the position of property developers and instead provides examples where there was never any doubt over the treatment.
The position is made worse because HMRC are not prepared to provide clearance in respect of this legislation. Shareholders are therefore expected to enter into liquidations ‘blind’ and in some cases this can mean that they do not know whether they will be taxed at 10% or 38.1% on the distributions – and to make things worse they could face penalties if they under-declare!
In many cases shareholders are not prepared to enter a liquidation with this level of doubt. In some circumstances it may make sense to extract value from the company through a sale rather than a liquidation. This would work as follows:
1. Identify a ‘friendly’ third party buyer.
2. Bring affairs of ‘Tradeco’ to a straight edge as you would in a liquidation.
3. Buyer sets up a new company (Newco) to buy the trading company (‘Tradeco’)
4. Newco buys Tradeco for its net asset value.
5. Newco pays for Tradeco using the reserves of Tradeco (which are paid up to it as a distribution).
6. Shareholder reports a capital gain without having to worry about the liquidation legislation.
This is a straightforward sale and therefore will not be affected by the new liquidation rules. Furthermore, it is unlikely that other anti-avoidance legislation can bite so as to ‘convert’ the capital gain into a distribution for tax purposes. These rules seem unworkable in their current form and so it seems reasonable (certainly in innocent scenarios) that tax payers should seek to gain tax certainty by transacting in a different way.
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