New distribution rules for solvent liquidations?

The Government in its Autumn Statement announced changes to the ways that dividends from company shares are taxed and these changes are likely to come in on 6 April 2016. The Government also announced potential changes to the way in which distributions from solvent liquidations are taxed.  

There is a concern from government that the solvent liquidation vehicle may in some circumstances be used purely to obtain a tax advantage particularly in respect of ‘phoenixing’ (distributing funds via a liquidation and then setting up a similar new business post liquidation eg service companies and property development companies) and ‘moneyboxing’ (retaining reserves rather than distributing them).   

Distributions via a liquidation in these circumstances could potentially be challenged and treated as income rather than capital if the distribution is made in the solvent liquidation of a close company (broadly one controlled by five or fewer shareholders), the shareholder is involved in a similar trade or activity in the two years post distribution and the main purpose of the liquidation, or one of the purposes, is to gain a tax advantage.  

It is important that clients in a solvent liquidation or considering entering into one obtain professional advice urgently to establish if these proposed changes will affect them and whether it would be advisable to proceed in to liquidation and make a distribution before 5 April 2016 as there is still time….just!

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