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TAAR on Liquidation Tax Tool

This tool is designed to provide an indication as to when the TAAR applies. 

See Our guide to TAAR on liquidiation & transactions in Securities for further details

Distributions on liquidation: TAAR Tool

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This TAAR tool checks whether you are claiming the correct tax treatment for distributions made following the closure of a trading company.

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If the payment is not being made on account of a shareholding it is probably not a distribution and is outside the scope of the TAAR. Contact Virtual Tax Partner support
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If the payment is being made to a company it will be outside of the TAAR.
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Liquidation or Winding up is the term to describe the formal process of dissolving the company by a liquidator.

Striking off is an alternative procedure.

  • A solvent company is dissolved and 'struck off' the Companies Register. It is also known as "dissolution".

See Ceasing Trading: overview

The TAAR does not apply to distributions made on striking off a company.

  • CGT treatment can only be claimed in respect of distributions of £25,000 or less on strike off.
  • When a company's assets available for distribution to shareholders on striking off exceed £25,000, the rules automatically deem that all distributions are subject to income tax. The TAAR will not apply as there is already income tax treatment.
  • When assets exceed £25,000 it may be preferable to secure CGT treatment by appointing a liquidator and winding up the company. If winding up the TAAR may apply.

See Distributions & striking off

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The TAAR does not apply as you have income tax treatment already.
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Explanation: Immediately before the winding up did you hold at least 5% of the ordinary share capital of the company and were able to exercise at least 5% of the voting rights? Note that if you hold any shares in a company jointly or in common with one or more other persons, you are to be treated as sole holder of so many of them as is proportionate to the value of your share (and as able to exercise voting rights by virtue of that holding).) The income tax joint shareholding rules for spouses are not relevant here.

The TAAR does not apply to small minority shareholdings and so Condition A of the TAAR is not met.

This means that you can self assess this distribution as capital.

See TAAR rules for more information, if you need it.

Ordinary shares are all the company’s issued share capital (however described), other than capital which gives its holder a right to a fixed rate dividend but have no other right to share in the company’s profit. Voting rights do not affect whether a share is ordinary or not. A preference share (i.e. a share with a right to a fixed rate dividend) is not an ordinary share.
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Explanation: Does the distribution exceed the CGT base cost of your shares? Your 'base cost' being the capital cost of your shares for tax purposes. Alternatively, is the distribution a distribution of irredeemable shares?

If the amount your receive only represents a return to you of the base cost of your shares, or less, the TAAR does not apply, this will not taxed as a distribution. If the distribution is during the course of a reconstruction and only consists of irredeemable shares the TAAR does not apply to you.

By 'distribution' we mean the cash paid out to you as a shareholder by the liquidator, on liquidation. 

  • If the amount you receive is only a repayment of share capital, this is not a distribution, the TAAR does not apply and you have made no gain/profit.

Your 'base cost' is the capital cost of your shares for tax purposes.

  • This will either be the price you paid for your shares if you subscribed or purchased them or, if they were gifted to you, your cost is the tax value of the gift.
    • The 'tax value' of a gift is normally the market value of the shars at the time of the gift. That value may be reduced if any claims or elections were made when you received your shares. i.e. a joint claim for CGT hold-over relief. See CGT disposal reliefs: business assets .

'Irredeemable shares' are shares that cannot be redeemed according to the company's articles. Distributions of this type of shares are typically used in reconstructions: these rules do not aim to affect group reconstructions on liquidation. See HMRC CTM36345 

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Conditions: Is the company a close company when it is wound up, or was it a close company at any time in the period of two years ending with the start of the winding up.

A close company is a company that is controlled by five or fewer participators. A participator is a shareholder or director, see What is a close company.

The TAAR does not apply to this distribution.
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Do you anticipate that, at any time, within the period of two years beginning with the date on which the distribution is made, any of the following apply to you?

  1. You will carry on a trade or activity which is the same as, or similar to, that carried on by the company or an effective 51% subsidiary of the company?
  2. You will be a partner in a partnership which carries on such a trade or activity?
  3. You will be a participator (as defined by section 454 of CTA 2010, see Close company definitions: who is a participator) in a company in which you have at least a 5% interest or, a person connected with you will be such a participator and which at that time:
    1. Carries on such a trade or activity? Or
    2. Is connected with a company which carries on such a trade or activity? Or
  4. Be involved with the carrying on of such a trade or activity by a person connected with you?

If you are sure that at the time of making the decision to liquidate the company, you fully expected to retire from this type of business (the type of business being carried on by the company when it was active) and, you had no intention of either being involved in or with any similar business in the two years following liquidation then the TAAR does not apply to you.

You may print off this result and self assess your liquidation dividends as capital.

This means that capital treatment should apply to the distributions received on liquidation of your company.

The next step is to see whether your disposal qualifies for Entrepreneurs' Relief: disposal of shares or securities in a company or Investors' Relief.

If you acquired your shares under SEIS or EIS, then check out the Which CGT relief? guide and see what claims are possible.

If you require further assistance contact Virtual Tax Partner support

The connection test asks whether you will continue to be directly or indirectly involved with the same or similar trade or activity as the company at any time within two years from the date of the distribution.

'Same or similar trade' is an objective test: would a third party think that the new business is the same or similar to the old one?

The indirect part considers whether you are 'Connected with' someone who is carrying on a similar trade: connected with means someone is connected to or with you, such as a family member, a company you control or the settllor if you are a trustee, see S993 ITA 2007

For further assistance contact Virtual Tax Partner support or to continue, click 'Yes' or 'No' to answer the Connection test question.

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Is it reasonable to assume, having regard to all the circumstances, that any of the following apply?

  • The main purpose, or one of the main purposes in winding up the company is to avoid or reduce income tax otherwise payable?
  • The winding up forms part of arrangements the main purpose, or one of the main purposes of which is the avoidance or reduction of a charge to income tax?

If you have no tax avoidance motive, despite meeting all the other conditions, the TAAR does not apply to you.

This means that capital treatment should apply to the distributions received on liquidation of your company.

The next step is to see whether your disposal qualifies for Business Asset Disposal Relief: disposal of shares or securities in a company or Investors' Relief.

If you acquired your shares under SEIS or EIS, then check out the Which CGT relief? guide and see what claims are possible.

 

It appears that the TAAR applies. Treat any tax gains made on the disposal of your shares as income distributions, i.e. as dividends.

You can re-assess the Tax avoidance motive by considering more detail: See our Condition D TAAR Assessment to do that.

If you are genuinely unsure whether you have a tax avoidance motive or if you are wondering how this might be measured contact theVirtual Tax Partner support service and we will take you through our Tax Avoidance Risk tool.

If you are unsure what your plans are at this point, it is probably more cost efficient to read over this guide: Ceasing Trading 

Alternatively, talk over the options with an adviser and contact the Virtual Tax Partner service.

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