D6.657 Profit extraction from family companies—capital transactions
Many commentators suggest the use of capital transactions as a tax-efficient method of extracting profits.
Clearly, capital transactions are not generally appropriate methods for withdrawing profit on a regular basis as they involve an element of finality. However, they may be appropriate on certain occasions, such as on the retirement of the business proprietor.
A potential advantage of such a transaction is that gains (on or after 6 April 2016) are taxed at a flat rate of 10% or 20% where the total taxable income of the individual exceeds the income tax basic rate. Gains on accrue on or after 23 June 2010, and before 6 April 2016, were taxed at a flat 18% or 28% where the total taxable income of the individual exceeded the income tax basic rate band.
Method of share disposal
Disposing of shares generally involves one of the following:
(b) liquidation; or
(c) company repurchase of own shares
Clearly, the first of these can give a capital gain which might be relieved by offset against other capital losses; the latter two may be more problematic.
For the most part, a distribution in liquidation is treated as giving rise to a capital gain. However, liquidation is undoubtedly a transaction in securities (see Division D9.1). This is not a point that HMRC usually take in respect of an ordinary liquidation1, but it is arguable that the position might be different