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CGT on Member's Voluntary Winding UP

Surplus cash in company.

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A client wants to wind up their company and extract funds by means of a  capital distribution. They also plan to allow cash reserves to build up beforehand. What are the anti avoidance traps? Could entrepreneurs' relief on the capital distribution be withdrawn?  I know having surplus cash can jepordise entrepreneurs' relief in certain circumstances but have not come across it is a winding up situation.

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By lionofludesch
24th Sep 2020 16:15

What are the circumstances which lead to the cash building up ?

What is the likely value of the company at the date of the proposed MVL ?

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By Mgdaly
25th Sep 2020 07:57

Surplus profits in excess of owner's needs. Somewhere between £0.6m and £1m.

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By Tax Dragon
25th Sep 2020 08:17

Cash sums are normally quite easily quantifiable, with a bit of counting.

Why the range? Is it not cash?

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By Mgdaly
25th Sep 2020 09:35

I was talking about the overall value of the company, so it's subjective.

Cash balance about £200k

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By Tax Dragon
25th Sep 2020 10:13

So it's not obvious that cash is the problem.

Cash is actually seldom an ER/BADR issue; it's what you do with the cash that matters. Have there been doings?

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By Tax Dragon
24th Sep 2020 16:23

Mgdaly wrote:

I know having surplus cash can jepordise entrepreneurs' relief in certain circumstances but have not come across it is a winding up situation.

'ER' law does not distinguish winding up from other forms of disposal.

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By SteveHa
25th Sep 2020 10:10

He was probably referring to loss of trading status if money boxing.

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By Mgdaly
25th Sep 2020 10:26

Concern is that cash left in the Ltd Co. is not extracted and therefore not subject to income tax. On a winding up a capital distribution will be subject to CGT. My enquiry is seeking to ascertain if there is any anti avoidance to treat the surplus cash (which would be part of a capital distribution) as being subject to income tax or perhaps risking the loss of ER relief.

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By Coops
25th Sep 2020 11:52

Could this HMRC manual paragraph be relevant? It will depend on what your client is intending to do following the liquidation.

"CTM36305 - Particular topics: company winding up TAAR: targeted anti-avoidance rule (TAAR)

ITTOIA05/S396B/404A

The purpose of ITTOIA05/S396B is to prevent individuals converting what would otherwise be a dividend into a capital payment, and so reducing their overall tax liability. This provision and ITTOIA05/S404A (see below) apply to distributions in a winding-up made on or after 6 April 2016, regardless of when the winding-up commenced.

Example

Mr J is a dance instructor who runs his business through his own company. At the end of each year, instead of paying himself a dividend (which would be liable to Income Tax), Mr J winds up his company and receives the profits as a distribution in a winding up, liable to Capital Gains Tax. He then immediately creates a new company and continues his dance instruction business

This practice is often known as ‘phoenixism’ (because the new company rises from the ashes of the old).

Targeted anti-avoidance rule (TAAR)

A distribution in a winding up made to an individual on or after 6 April 2016 will be treated as if it were a distribution where certain conditions are met. For the rule to apply, all of the following conditions must be met:
•Condition A: The individual receiving the distribution had at least a 5% interest in the company immediately before the winding up
•Condition B: the company was a close company at any point in the two years ending with the start of the winding up
•Condition C: the individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution
•Condition D: it is reasonable to assume that the main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to Income Tax.

A distribution in a winding up is not treated as a distribution under S396B to the extent that the amount of the distribution does not exceed the amount that would result in no gain accruing for the purposes of Capital Gains Tax, or where the distribution is of irredeemable shares.

Non-UK resident companies

ITTOIA05/404A applies the same treatment where an individual receives a distribution in a winding up from a company that is non-UK resident (although it taxes the receipt as a dividend rather than a distribution because of the difference in wording between ITTOIA05/S383 and ITTOIA05/S402).

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By Mgdaly
25th Sep 2020 12:26

The situation I have is a genuine retirement so not aught by TAAR.

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By Tax Dragon
25th Sep 2020 12:26

I don't disagree. Of course, that anti-avoidance targets a specific set of circumstances (hence "TAAR"). The OP has not provided any detail for any of us to assess whether this TAAR or any other TAAR may or may not be in point.

If the OP really just wants a list of TAARs (this is a bit like that "niggles" thread) I'll add my one now: I note ITA2007 s684(2)(f) refers to "a distribution in respect of securities in a winding up".

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By Montrose
26th Sep 2020 23:37

I agree with Coops on TAAR issues.
Before winding up, is there any IHT advantage in keeping the company going?
If however the greater part of the value is in "surpus "cash, the company would probably fail the BPR tests.
In a post Covid world any planning based on current law continuing unchanged
beyond the immediate present is risky.

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