Distributions in a winding up

Distributions in a winding up

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The new distribution rules from 6/4/16 (s35 Finance Bill 2016) state:

at any time within the period of two years beginning with the date on which the distribution is made—

...

(c) the individual, or a person connected with him …, is a participator in a company in which he … has at least a 5% interest and which at that time—

(i) carries on such a trade or activity, or

(ii) is connected with a company which carries on such a trade or activity, or

(d) the individual is involved with the carrying on of such a trade or activity by a person connected with the individual.

Am I reading incorrectly in thinking this means liquidation distributions will be caught where a relative (e.g. brother in law) operates within the 2 year window as a limited company IT contractor, but who may otherwise have no relationship with the taxpayer (who lets assume was an IT contractor)? Not sure how widely to interpret 'such a trade or activity'.

Replies (6)

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By Ruddles
04th Apr 2016 16:54

Possibly

But did you read condition D?

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By geroge
04th Apr 2016 17:02

Hi Ruddles, yes I did think about that afterwards, and that is what we would need to rely on.

Still, it's outrageous the way C (c) is currently drafted!

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By Ruddles
04th Apr 2016 17:06

Why is it outrageous?

D seems to offer a pretty clear get-out in your circumstances. It is of course subjective but it would be a brave Inspector that argues that your client was winding-up for tax purposes in the circumstances that you outline.

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By geroge
04th Apr 2016 17:14

Maybe outrageous is putting it too strongly, but I meant it could easily be drafted to make it explicit the new business requires some involvement from the taxpayer. Then we wouldn't even need to consider D.

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By Portia Nina Levin
04th Apr 2016 17:26

Yes, but then there would be all sorts of schemes to try and side-step the legislation using connected persons.

For example, I transfer the shares in my trading company to my brother. He holds the shares (and is a director of the company) for a year, and the company is then put into MVL.

He gets a £1,000,000 distribution which is pure gain, and on which he pays tax of £100,000.

He kindly makes a gift to me of £900,000.

I set up a new company doing exactly the same thing as the old company the day the the old company is put into MVL.

Do we think this should get caught?

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By Ruddles
04th Apr 2016 18:14

And ...

And it is just possible that an individual may have a legitimate, non-tax, reason for winding up one company and starting another. Where would he be without the protection of condition D?

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