Now that we have passed the 31 January deadline for tax returns and we accountants are thinking of taking a breather, it may well be time to look at our owner managed clients who, for a variety of reasons may be thinking about ceasing to trade and returning funds to shareholders.
This may be being considered for a number of reasons, for example, the company’s owners wish to retire and there is no successor or where the business and assets of a company, rather than the shares, have been sold and the shareholders wish to extract cash. It may equally apply to one man service companies where a specific contract that has been carried out has come to an end.
If this is the case, in most owner managed businesses, Entrepreneurs Relief will be available resulting in capital distributions being taxed at 10% on cessation, providing significant tax savings compared to making distributions to shareholders by way of dividends.
The process will require the appointment of a liquidator to carry out a Members Voluntary Liquidation (a solvent liquidation) and deal with the distributions but even after the associated costs there will be a significant overall saving for the shareholders. Of course each situation is different so it will be essential to take advice to ensure that Entrepreneurs Relief does apply and indeed that the circumstances are right for a Members Voluntary Liquidation to proceed. Planning is a crucial element from a tax point of view for both the Company and the shareholders and it is important that proper consideration is given to the appropriateness and timing of any liquidation. Seeking advice from a Licensed Insolvency Practitioner to ensure that the wind down of the Company is dealt with efficiently and expeditiously will be key.
Where distributions are less than £25,000 ESC C16 can still be utilised but as we approach the next deadline of 5 April there is still time to implement a solvent liquidation so that shareholders can take advantage of Entrepreneurs Relief in this tax year. Shareholders could additionally take advantage of two (or more) years capital gains tax allowances by the liquidator making two distributions, one before 5 April and one after.
The cessation of a solvent company’s business holds important considerations for the directors and shareholders and as always it is recommended that both the Company and the individual shareholders take appropriate professional advice according to their particular situation.