Date posted: 5th Dec 2019
It is usually the case that, when a company enters a member’s voluntary liquidation (“MVL”), any proceeds subsequently distributed to the shareholders are treated for tax purposes as a capital payment and therefore subject to capital gains tax. Thus the funds received are potentially subject to a tax charge as low as 10%.
It has been rumored that HMRC was challenging the position and would deem that, in certain circumstances, those monies received were subject to the more penal income tax rules. The particular circumstances were when the shareholder (usually in their other capacity as a director) has taken a loan from the company ahead of the company entering the MVL. The subsequent “distribution” of the loan account was believed to under challenge from HMRC. If successful, HMRC could impose an income tax charge as high as 38.1%.
However, those rumors and fears have been allayed and HMRC have updated their guidance (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm61559) to state that the monies will be taxed as a capital payment.
The 10% tax charge depends upon whether entrepreneurs’ relief is available to the shareholder and given the recent changes to this relief over the last couple of years, we would recommend that all shareholders review their personal situation. In addition, business owners should take care not to trigger the targeted anti-avoidance ruling regarding “phoenix” companies and again, we would recommend that advice should be taken.
As ever, if you have any queries on member’s voluntary liquidation (or any other tax matter), then our specialist tax experts are only a phone call away.