Members' voluntary liquidations distributions set to be reassessed for tax purposes—draft Finance Bill 2016

What do the provisions in the draft Finance Bill 2016 concerning the tax position on distributions to shareholders in a members voluntary liquidation (MVL) mean for insolvency practitioners?

Original news

The government published draft tax legislation on 9 December 2015 for inclusion in the Finance Bill 2016. Consultation on the draft legislation will run until 3 February 2016.

It is proposed that for transactions entered into on or after 6 April 2016 a targeted anti-avoidance rule (TAAR) is to be introduced for companies. The measures being introduced are intended to restrict the opportunities for shareholders to convert to capital what might otherwise be paid as an income distribution (most commonly a dividend).

What does this mean for companies in an MVL?

This means that if the following conditions are met, an individual who benefits from a distribution of share capital from the liquidation of a company may be subject to income tax.

The conditions are:

  • the distribution is received from a close company on a winding up
  • the individual continues to be involved in a similar trade or activity within two years after the distribution
  • the main purpose(s) of the winding up is to secure a tax advantage

Who will be affected by this in practice?

The new measures are being introduced as a TAAR. This TAAR is designed to address situations where a company is wound up and shortly after a new one is established which carries on substantially the same activities as the old.

Placing a company into liquidation before 6 April 2016 will not enable shareholders to avoid the new rules unless the distributions are also made before 6 April 2016. Therefore advisors should discuss these measures with their clients sooner rather than later now in order to plan effectively.

Eleanor Stephens, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

What is an MVL and where/when are they typically used?

MVLs versus striking off

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First published on LexisPSL Restructuring and Insolvency

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