On 1 March 2012 Statutory Instrument 2012 number 266 - The Enactment of Extra-Statutory Concessions Order 2012 - came into force, with Extra Statutory Concession (ESC) C16 being effectively withdrawn
Before 1 March 2012 a company could apply to HMRC under ESC C16 to request, subject to certain conditions, that distributions made by a company just before it is wound up could be subject to capital gains tax in the hands of the shareholders.
Without such a request, the distribution of its distributable reserves would be treated as dividends and the balance of the distribution would be a return of capital.
Now, the capital gains tax treatment will only be available if the distribution is no more than £25,000.
If the distributable reserves are no more than £25,000 it is for the directors to decide whether to treat the distributions of such reserves as capital or income.
If the distributable reserves exceed £25,000 the distribution will be treated as a dividend.
If an interim distribution, in respect of share capital prior to dissolution of company, is made before 1 March 2012 and further distributions are made on or after 1 March 2012 and the total distributions amount to more than £25,000, then all the distributions made on or after 1 March will be subject to income tax, except for the return of capital element.
For example if after receiving agreement of HMRC that ESC C16 will apply a distribution of £14,000 is paid on 10 February then a final distribution of £18,000 is paid on 15 March, then in HMRC’s view the whole amount of £18,000 will be subject to income tax. If the company had 100 issued fully paid shares of £1 each then the final distribution would be split between £100 return of capital subject to capital gains tax and £17,900 subject to income tax as a dividend.
If HMRC gives its agreement that ESC C16 can apply, and the distributions are made before 1 March, then the distributions will be subject to capital gains tax.
If a liquidator is appointed on behalf of members or creditors, then the distributions made by the liquidator to the shareholders will be subject to capital gains tax in the hands of the shareholders with no upper limit. This situation has not changed.
This change will mean that directors will need to undertake some careful planning if they are considering winding up the company and distributable reserves are more than £25,000. They may consider reducing distributable reserves in the normal ways while the company is still carrying on business and they may consider having the company purchase its own shares from the shareholders.