TAAR / divorce

Does condition D apply?

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Hi all 

I would appreciate your opinions on this.

H&W who run a consultancy company (both actively working in the business) are due to get divorced. They will most likely each run their own business individually straight after the company ceases to trade.

There are P&L reserves mean that an MVL would be (just about) worthwhile, if the TAAR was not going to apply.

I would say Conditions A-C are definietly met, but I am unsure on Condition D.

There is definitely a tax advantage, but the main reason for company closure is the divorce, and the tax advantage is secondary to this. Could this work?

My understanding is that informal strike-offs are not subject to the TAAR, but are there other rules that could mean they lose capital treatment (presuming they can get net assets below £25k before trade ceases) ?

  • 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.

Replies (5)

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By Duggimon
12th Jan 2023 09:44

I would think that the two equal shareholders, both active in the business and office holders (some assumptions here but nothing deal breaking) getting divorced is more than sufficient to be considered the main reason for the winding up, I would have no hesitation in applying capital treatment.

There will always be a tax advantage in capital treatment which is why we need a TAAR, cases like this are well out of the discussion though.

Thanks (2)
By JCresswellTax
12th Jan 2023 10:09

I would agree with Duggimon, the very reason for this winding up is because of divorce, once that is clear, you then consider how to close down the company. The tax benefit is secondary to the reason for winding up the company.

Incidentally, I feel the same could be said for those clients who are closing down their company due to a lack of outside IR35 work these days, but that's another story...

Thanks (1)
By Ruddles
12th Jan 2023 11:00

I agree with the above two responses.

Out of interest, though, you say "presuming they can get net assets below £25k before trade ceases". Did you mean to say "... cannot ..."? Because if they can in fact get net assets below £25k (other than by way of dividend) why would you not go for an informal strike-off - as you say, the TAAR should not apply in any event?

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Replying to Ruddles:
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By Carl London
15th Jan 2023 08:21

I did mean if they could alternatively get below £25k, e.g. if they happened to want to make suitably high pension contributions before trade ceases (seems unlikely).

As there are 2 individuals with 2 annual exemptions which can be used in the next few months, we can get more out at 0% with a MVL.

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Replying to Carl London:
By Ruddles
15th Jan 2023 11:02

What are the “other rules” to which you refer in your question?

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