Taxing of Distributions

You will no doubt have heard that changes to the way dividends are taxed are being introduced in April 2016 and will apply new “Dividend Rates” of income tax to distributions made to shareholders.
However, you might not be aware that in December the Government also launched a consultation aiming to bring in supporting legislation to prevent shareholders getting around the new rules by utilising current exemptions that treat distributions as capital when a company is wound up.

Currently, in a solvent liquidation (“MVL”), any retained profits are treated as capital for distribution purposes and may qualify for Entrepreneur’s Relief at a rate of 10% if the circumstances fit the criteria to do so.

The consultation identifies specific examples of commonly utilised structures where, if the proposal is enacted, would see distributions, even in MVL treated as income rather than capital and taxable accordingly under the Dividend Rates.

  • Money boxing – where funds are accumulated in a Company without dividends being declared, which are then distributed as capital;
  • Phoenixes – where a Company is liquidated and another established to carry on its business, with the reserves in the “oldco” being distributed as capital and;
  • Special Purpose Vehicles (“SPV”) – essentially the use of a limited company which is wound up at the end of a project with the funds remaining distributed by way of capital distribution.

The effect of this could be significant – distributions could be taxed at up to 38.1% against the 10% currently available with Entrepreneur’s Relief.

The consultation ends early February and it is proposed that the changes will take effect from 6 April 2016 in relation to distributions made after that date – including those made out of Liquidations that have already commenced.

Whilst the outcome of the consultation is by no means certain, shareholders and Professional Advisers should review their portfolios now to identify any structures that might be subject to the new rules after April 2016.


About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.
This entry was posted in Business Owners Advice, Tax Planning Advice.

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