Government tightening Rules for Entrepreneurs Relief?

Entrepreneurs Relief

There are potential changes affecting distributions in solvent liquidations within the proposed 2016 Finance Act coming into effect on 1 April 2016. The time period for interested parties in which to respond to the Government’s consultation document regarding company distributions has now closed.

Whilst dependent upon the outcome of that consultation, its seems likely that a new TAAR (Targeted Anti-Avoidance Rule) will come into effect, suggesting that as of 6 April 2016, any distributions to shareholders in an MVL (Members’ Voluntary Liquidation) could be considered an income distribution rather than a capital distribution, as is the case presently.

Three criteria will be looked at:

  • An individual receives distribution in the winding up of a company in which he is a shareholder
  • Within 2 years after the winding up, the individual is involved in a similar trade or activity, and
  • One of the main purposes of the winding up was to obtain a tax advantage.

Therefore some shareholders who may expect to pay a 10% capital gains rate if Entrepreneurs Relief is available, may actually end up paying tax on that income at the higher dividend rates up to 38.1%. An increase of 28.1% on the funds withdrawn.

Shareholders in these circumstances should seek urgent guidance on their options. Time is running out to take action if these rules are to take effect in April 2016.

If we can be of assistance on either of these issues, please contact a member of our team.