I have been approached by a client this week for some guidance on the new distribution rules on the wind up of a limited company and I must confess, the details of this change are tripping me up. The scenario is as follows:
Mr A and Mrs A are married
Mr B and Ms C are unmarried (but live together, have children etc etc)
Mr A and Mr B are 50/50 owners and directors of at least two property development companies at the moment. My understanding is if any of these companies are wound up and the motive for doing so is considered tax mitigation, they will be caught by the new rules and required to apply income treatment as they are still carrying on the same trade elsewhere. Is this correct?
Mr A and Mr B are looking to start a new venture by purchasing and developing another site and are wondering if setting up this new company with Mrs A and Ms C as 49/51 shareholders would enable the new development to be carried out and wound up without the resulting distribution falling under the new rules.
This is where things get very hazy for me. As I understand it, the distribution is assess for income or capital at the individual level. Mrs A would be required to follow income treatment due to her connection with Mr A but Ms C would get capital treatment as she is not connected with Mr B. Firstly, is this right? And secondly, does the 49/51 split make any difference here or would the result be the same if it were a 50/50 business? The senior partner of my firm seems convinced this would work but I'm less sure.
I understand this could all be irrelevant if one could sucessfully argue the steps were not taken to gain a tax advantage but lets just assume we've lost that argument.