Shareholders of companies that have ceased business can appoint a liquidator to carry out a formal winding up of that business to pay out the accumulated profits that have built up over the life of that business.
What role does a Liquidator play in winding up a company?
The appointment of a liquidator under a formal winding up can mean that the shareholders are treated for tax purposes as disposing of their shares for the amount they receive from the liquidator, thus paying capital gains tax (CGT) on the disposal instead of income tax (IT) on a dividend. CGT rates are currently lower than dividend rates of IT (lowest CGT rate 10%; highest IT rate 38.1%) and so obtaining CGT treatment can be a more attractive outcome for shareholders.
What is the ‘informal’ winding up of a company?
Where a company has ceased to trade and its net funds position after satisfying all creditors and securing all debts will not exceed £25,000, it is possible to carry out an informal winding up by applying to Companies House to strike the company off under s1003 Companies Act 2006. The tax treatment would be the same as in a formal winding up, whereby the net funds are treated as a capital distribution liable to CGT.
What happens to shareholder dividends during the winding up of a company?
If the company has net funds of more than £25,000 following a cessation of trade, the default position is that the sums paid to shareholders will be treated as dividends liable to IT at their marginal rate. This treatment may suit some shareholders who are basic-rate taxpayers, who may also benefit from the £5,000 tax free dividend allowance, but not those whose marginal IT rate exceeds the CGT rates.
Profit extraction can still be achieved in a tax efficient manner provided acceptable steps are taken in advance to improve your tax position.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.