The government has published responses to its recent consultation on company distributions and made some minor amendments to new rules on distributions proposed in the Finance Bill 2016.

Changes to dividend tax combined with the difference between the rates of CGT and Income Tax encourage individuals to take profits, if possible, as capital, rather than as income. The distributions consultation looked at four key ways a shareholder can receive value from a company in a form subject to CGT: 

  • A disposal of shares to a third party.
  • A distribution made in a winding-up.
  • A repayment of share capital (including share premium). 
  • A ‘valid’ purchase of own shares (for unquoted companies). 

The Finance Bill 2016 contains draft provisions which will:

  • Introduce a targetted anti-avoidance rule (TAAR) to combat the practice of "phoenixing".
  • Tighten up the Transactions in securities rules so that they have wider application.
  • Simplify the process by which HMRC can seek to counteract a tax advantage.

Clearances provided before 6 April will state whether the proposed changes are expected to affect the clearance being given. From 6 April 2016 the clearance letter will be further amended to deal with the period from 6 April until Royal Assent is received for the Finance Bill.

The government considers that its approach of strengthening the Transactions in Securities rules and addressing phoenixism through the introduction of a TAAR is currently the right overall approach. 

The proposed legislation will treat distributions from a winding up as an income distribution where four conditions A to D are met. Broadly, these conditions are: 

  • Condition A: The individual holds a 5% share of the company.
  • Condition B: The company is a close company.
  • Condition C: The person that receives the distribution continues to be involved, directly or indirectly, with the carrying on of the same or a similar trade or activity to that of the wound up company; and 
  • Condition D: The main purpose, or one of the main purposes, of the arrangements as a whole is to obtain a tax advantage. 

The government has amended the draft legislation so that: 

  • It will not apply to minority shareholders.
  • "Arangements" is clearly defined.
  • Distributions will not be treated as income to the extent that they represent the Capital Gains base cost. 
  • The TAAR will not apply to standard liquidation demergers. 

Further amendments will provide additional clarity, for example in how the rules apply to partnerships or holding companies. 

HMRC will also publish guidance on the new rules using a number of examples to demonstrate the type of transactions to which HMRC consider the new TAAR should and should not apply.

The revised legislation will form part of the Finance Bill 2016 and remains due to come into effect from 6 April 2016. 

There is no current consensus in favour of a more wide-ranging review of the distributions legislation, and the government has no current plans for such a review. 


Transactions in Securities

Company distributions: summary of responses