The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
Targeted anti-avoidance rules (TAARs) which aim to combat cases of ‘phoenixism’ apply to certain distributions made in the process of winding up companies on or after 6 April 2016.
The term ‘phoenixism’ typically refers to the scenario where a company is liquidated and subsequently its business is carried on under the same or broadly the same ownership via a new entity. This may be for commercial / legal reasons or to achieve a tax saving from obtaining capital rather than income treatment on the distribution which could mean that entrepreneurs’ relief (ER) is available. Discussion of the legal issues of such an arrangement is outside the scope of this guidance.
For distributions made before the TAAR came into effect on 6 April 2016, ‘phoenix’ arrangements may have been caught in any case by the transactions in securities (TiS) legislation in certain circumstances. This is discussed further below under Treatment of distributions made in certain liquidations pre-6 April 2016.
In addition, HMRC might (both before and after 6 April 2016) contend that in such arrangements, the ‘trading company’ requirement for ER is not met. This would be on the basis that accumulated cash reserves represent ‘non-trading’ assets on the company’s balance sheet. Of course, there are also other important measures that may point towards the company being a trading company (such as sales, profits / income, and employee / management time). However, if ER is not available, the default CGT rate is now only 20%.
For further guidance, see the Transactions in securities and Conditions for entrepreneurs’ relief guidance notes.
General guidance on liquidations is in the Administration and liquidation guidance note.
For liquidation distributions made after 5 April 2016, TAARs apply in respect of certain distributions made in the course of company liquidations.
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