Date posted: 17th Feb 2025
The end of the tax year is approaching and there are planned changes to capital gains tax rates from 6 April 2025.
You may therefore be considering putting your company into member’s voluntary liquidation (MVL) to extract the monies that the company has in a tax efficient manner.
Hopefully you will have taken tax advice in respect of the proposed MVL but if not, you will need to consider some of the issues below (non-exhaustive):
- Whether business asset disposal relief (BADR) will apply in your circumstances – is the company trading (or has done so in recent years), are you an officer/employer, do your shares have the appropriate rights etc?
- Whether you have previously claimed BADR and that needs to be considered in your calculations as you may have used some of your lifetime allowance.
- Whether you have any unused or unclaimed losses to offset against the capital gain.
- Whether the company can make a dividend or pension payment ahead of the MVL being contemplated.
- Whether you need a liquidator or can strike off the company under the statutory £25,000 limit.
- Whether you are at risk of the “phoenix rules” applying.
The phoenix rules or officially the targeted anti avoidance rule (TAAR) give HMRC the power to overturn the capital gains tax charge and impose income tax on the monies received from the company – regardless of whether a liquidator is appointed.
The TAAR can apply where the four conditions below are all met:
- The individual receiving the distribution had a 5% (or more) interest in the company.
- The company was a close company in the two years prior to winding up. In simple terms, if the company had five or less shareholders.
- The individual receiving the distribution carries on or is involved with a similar trade or activity in the two years from the date of the distribution.
- It is reasonable to assume that one of the main purposes of the transaction is the avoidance or reduction of a charge to income tax.
It is therefore critical to avoid re-starting a similar trade – even if this is done within a different vehicle, such as a sole trader or partnership.
If this does happen, then the onus will be on you to ensure that the fourth condition is not met. It may be, for example, that you planned to retire and leave the industry but within 18 months, an opportunity too good to turn down comes along. In that case, there may be an argument that the original plan was to retire and was never to avoid income tax.
If you feel that there is a risk of the TAAR being imposed but you believe that not all of the conditions are met, then it may be worthwhile disclosing the position to HMRC as part of your self assessment tax return which should help mitigate the time limit, HMRC have to ask any queries.
As ever, if you need help or advice, please give us a call.
