PHILIP A BECK
Licensed Insolvency Practitioner
41 Kingston Street, Cambridge CB1 2NU
Tel: 0800 1953605 (Free call) or 01223 367022
Fax: 0844 5048737
Once a limited company has gone into liquidation, any dividends paid to the shareholders count as capital receipts rather than dividend income. This means that they are subject to the capital gains tax (CGT) regime rather than the income tax regime.
Whether this remains beneficial or not following the increase in capital gains tax following George Osborne's 2010 Emergency Budget, will depend firstly upon the CGT base cost of the shares in the company, whether Entrepreneur's relief will be available (see below), and also the taxpayer's marginal tax rate. Capital gains will count as the top splice of a taxpayer's income, and will be taxed at 18% for gains that take the taxpayer up to the basic rate limit, then 28% thereafter. The £10,600 tax-free capital gains allowance remains, for now.
Entrepreneurs Relief (replacing the previous retirement relief) is available to individuals disposing of shares in a trading company or the holding company of a trading group in which they were an officer or employee holding at least 5% of the voting rights thereof, and allows relief on lifetime gains up to £10 million (increased from £5 million in the 2011 budget). It is not available to non-trading or investment companies. Entrepreneurs Relief effectively reduces the tax rate on any capital gain to 10%. A full description of Entrepreneur's relief is outside the scope of this website, refer to HMRC - Entrepreneur's relief for a detailed explanation. If Entrepreneur's relief is available, then liquidation will be a more favourable tax treatment, although for non or basic rate taxpayers, consideration should be given to declaring an income dividend before the liquidation to use up the basic rate allowance.
If Entrepreneurs Relief is not available, for instance for a property company, then liquidation is likely to be beneficial either if the CGT base cost of the shares in the company is substantial, or for 50% top rate taxpayers, or if the likely capital distribution will place the taxpayer into the 50% band, this is because for 40% taxpayers, the 32.5% rate of rate of tax on dividend income, when taken in conjunction with the 10% tax credit, comes out at an effective rate of 25% on dividend payments actually received, as against the new 28% higher rate of capital gains tax. For 50% income tax payers, the effective rate of dividend tax is 36.1% on dividends received, 8.1% higher than CGT.
Philip Beck is a Chartered Accountant and Licensed Insolvency Practitioner operating since 1996 with substantial experience in undertaking liquidation, both solvent and insolvent.
Please note that this site deals only with company and tax law in the United Kingdom of Great Britain and Northern Ireland. It is not applicable to other jurisdictions.
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