Warren Baker, our partner explores the way company distributions are taxed under the new system.
New rules introduced earlier this month have changed the way in which company distributions are taxed – and the new rules have particular implications on the winding-up of businesses.
The Government fear that too many individuals are liquidating companies to capitalise on Entrepreneurs Relief that enables the extraction of profits as capital and results in tax at 10% as opposed to dividend income which can suffer tax up to 38.1%.
This is further compounded by the fact that as of 6 April 2016, the rate of Capital Gains Tax (CGT) has been reduced from 28% to 20% for higher rate tax payers on the disposal of all but residential property. This can be further brought down to 10% with Entrepreneur’s Relief (ER).
It looks likely that more distributions on the wind-up of a company will now be taxed as if it were a dividend distribution as opposed to a capital distribution. The legislation has not yet had royal assent and may be subject to change, but as it stands there will need to be a serious rethink by many entrepreneurs who had structured their affairs to receive a capital distribution.
Wilson Wright LLP
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