Question: The major contract of one of my companies is soon coming to an end.
The company has been profitable but without this contract it is unlikely to do much trading in the future. Is there a way to stop this company trading and then tax efficiently distribute the value of what is left to me as a shareholder? | Nathan, Chigwell.
Answer:
Once your company has finished trading and all debts have been collected, and creditors paid, the company will be left with cash in the bank. There is both a formal and informal route to maximise your tax efficiency of getting this cash into the hands of the shareholders.
The informal route allows the shareholders of a company to apply to HM Revenue and Customs to use ‘Extra Statutory Concession C16’, which allows the shareholders to distribute the assets of the company and treat this as a capital transaction, rather than income distribution.
This means that instead of an additional income tax charge the shareholders will pay Capital Gains Tax, and if they are entitled to Entrepreneurs’ Relief this will only be at 10%.
The access to a potentially low rate of tax by a capital distribution of assets makes this route very attractive. However, HM Revenue and Customs are thinking of replacing this concession in April 2011 with formal legislation.
The likely impact is that the capital treatment will be restricted to companies with assets of less than £4,000. If you want to use this route as it stands then you may have to act fast.
The formal route should still remain. This involves using a licensed insolvency practitioner to formally liquidate your company. This process will achieve the same ends as the informal route and will allow the transaction to be treated as capital with all of the potential tax benefits. However, the formal route will be more costly as the fees for the insolvency practitioner will need to be covered.
