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Business Services  •  Business Tax  •  Personal tax  •  Small Business  •  Tax Planning  •  Tax Relief

Tax update: Changes to the taxation of liquidation funds – ‘Phoenix trades’

By Lesley Stalker on 13 January 2016

When a company enters into a members’ voluntary liquidation and a new company, or trade, is set up to carry on substantially the same activities, HMRC refer to it as a ‘phoenix trade’. In this case the shareholders receive all of the value of the company in a capital form while the trade continues exactly, or substantially the same, as before.

Changes were announced in the 2015 Autumn Statement to the way in which shareholder funds on the liquidation of a company are to be taxed and the 2016 Finance Bill gives more detail of the changes, which specifically target the use of ‘phoenix trades’.

These changes should not be confused with other proposed changes to the taxation of company funds which HMRC refer to as ‘money boxing’, and which are currently under consultation until 3 February 2016. Those proposed changes have potentially more far reaching effects and the current position is explained in another blog .

Back to phoenix trades – currently, any distribution received on a winding up is charged to capital gains tax (CGT) in the hands of individual shareholders, unless anti avoidance provisions apply. If the individual qualifies for entrepreneurs’ relief (ER) the rate of tax applying is 10%, if not, the rate is 28%.

Under the new proposals, distributions received in some circumstances will be chargeable instead to income tax, with rates of up to 38.1% applying.

The new rules will apply to distributions made after 5 April 2016, regardless of whether the liquidation commences before or after that date. They will apply if the following three conditions are all met:

 

  • Condition A – the company is a ‘close company’ (or has been so within the previous two years). This is a company which is controlled by 5 or fewer shareholders or is controlled by its directors. In practice, most privately owned companies are close companies.
  • Condition B – within two years after the date of the distribution, the individual receiving the distribution (or someone connected with him or her) is involved in carrying on any trade or other activity previously carried on by the company (or any similar trade or activity). This can involve trading either as a company, partnership, LLP or sole trader.
  • Condition C – it is reasonable in all the circumstances to assume that one of the main purposes of the liquidation is the avoidance of income tax. (If Condition B is met this will be a relevant circumstance).

 

These rules apply to liquidation funds received by individuals only, not by limited companies on the liquidation of a subsidiary, and they do not apply on the outright sale of shares to a third party purchaser. Where a company is liquidated on the retirement of the director/ shareholders, the rules will also not apply, because Condition B will not be met.

Companies have until 5 April 2016 to prepare for the above changes and complete any required tax planning in order to be certain about the future tax treatment. If you wish to discuss the impact of these changes please contact Lesley Stalker las@rjp.co.uk.

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When a company enters into a members’ voluntary liquidation and a new company, or trade, is set up to carry on substantially the same activities, HMRC refer to it as a ‘phoenix trade’. In this case the shareholders receive all of the value of the company in a capital form while the trade continues exactly, or substantially the same, as before.

Changes were announced in the 2015 Autumn Statement to the way in which shareholder funds on the liquidation of a company are to be taxed and the 2016 Finance Bill gives more detail of the changes, which specifically target the use of ‘phoenix trades’.

These changes should not be confused with other proposed changes to the taxation of company funds which HMRC refer to as ‘money boxing’, and which are currently under consultation until 3 February 2016. Those proposed changes have potentially more far reaching effects and the current position is explained in another blog .

Back to phoenix trades – currently, any distribution received on a winding up is charged to capital gains tax (CGT) in the hands of individual shareholders, unless anti avoidance provisions apply. If the individual qualifies for entrepreneurs’ relief (ER) the rate of tax applying is 10%, if not, the rate is 28%.

Under the new proposals, distributions received in some circumstances will be chargeable instead to income tax, with rates of up to 38.1% applying.

The new rules will apply to distributions made after 5 April 2016, regardless of whether the liquidation commences before or after that date. They will apply if the following three conditions are all met:

 

  • Condition A – the company is a ‘close company’ (or has been so within the previous two years). This is a company which is controlled by 5 or fewer shareholders or is controlled by its directors. In practice, most privately owned companies are close companies.
  • Condition B – within two years after the date of the distribution, the individual receiving the distribution (or someone connected with him or her) is involved in carrying on any trade or other activity previously carried on by the company (or any similar trade or activity). This can involve trading either as a company, partnership, LLP or sole trader.
  • Condition C – it is reasonable in all the circumstances to assume that one of the main purposes of the liquidation is the avoidance of income tax. (If Condition B is met this will be a relevant circumstance).

 

These rules apply to liquidation funds received by individuals only, not by limited companies on the liquidation of a subsidiary, and they do not apply on the outright sale of shares to a third party purchaser. Where a company is liquidated on the retirement of the director/ shareholders, the rules will also not apply, because Condition B will not be met.

Companies have until 5 April 2016 to prepare for the above changes and complete any required tax planning in order to be certain about the future tax treatment. If you wish to discuss the impact of these changes please contact Lesley Stalker las@rjp.co.uk.