Pulling capital out of business - income shifting

Pulling capital out of business - income shifting

Didn't find your answer?

I have a client with a limited company whose only income in the last year was rental income, but his tenants have all left now so this has ceased.  He has found a buyer for the building the company owns and intends to sell it, pull out the capital in the business and strike it off.  He has quite a large mortgage to settle first so the capital he will have to withdraw will only be about £35k. 

I am thinking that if he first gifts his wife half of the shares of the company, then declares them both a dividend to bring the total capital in the business to £25,000, they can then both receive a capital distribution of £12,500.  Each then uses their allowance of £11,000 and so only pays capital gains tax on £1,500 (him at 10% using entrepreneurs relief, her at 18% as she hasn't held the share for one year+ so wouldn't qualify).

On the one hand this gift would be substantially a right to income and is basically a way of them reducing the tax bill.  But reading the settlement legislation, previous cases, and other forum threads it appears that HMRC would not invoke the legislation in similar husband/wife situations because of the capital rights and control derived from owning the shares.  My understanding is that if he gifted the shares and then continued declaring dividends it would be fine, but am wondering whether because he already intends to strike off the business this is an issue?

appreciate any comments, thanks

Replies (3)

Please login or register to join the discussion.

By JCresswellTax
06th May 2014 14:06

Income shifting isn't your concern

Its paying dividends to lower the reserves to £25k that isn't allowed.

Thanks (0)
Replying to penelope pitstop:
avatar
By Nthorne09
06th May 2014 14:57

Thanks, so he will either have to have it as income or be liquidated - I will advise as such.  Just for my own understanding, if the capital distribution had been under £25,000, would the scenario I said have been ok?

Thanks (0)
By JCresswellTax
06th May 2014 15:43

Yes you have it now

If you are using the £25k limit, you cannot make income distributions to bring down the reserves to under the £25k.  So as you say, you either need to pay it all as dividends or go down the MVL route.

If the reserves were always under £25k, you would just close it down via capital distribution with no problems.

Thanks (1)