Debbie Cockerton explains the rules around solvent liquidations and Entrepreneurs’ Relief (ER)
Well, the Budget has come and gone, and before it happened we had quite a few enquiries about Entrepreneurs’ Relief to shareholders in a solvent liquidations. There were rumours that this relief may be axed, so we were getting ready to have an avalanche of liquidations so that people could take advantage of this relief.
Needless to say, that the rumour was not entirely true, and the current 10% rate of tax was not affected. Therefore this is a very good saving on tax when deciding to close a business down, compared with the 20% capital gains tax for higher rate taxpayers.
Entrepreneurs’ Relief will be available in most cases where:
• Sole traders and partners that are selling/gifting the whole or a distinct part of their business; and
• Directors and employees holding at least 5% of the ordinary shares with voting rights in a qualifying trading company who sell/gift all or part of their shareholding.
The term ‘qualifying’ means that a non-trading activities business should not carry on ‘substantial’ non-trading activities and it is generally accepted that 20% is the amount. A check of the company’s balance sheet and profit and loss account can determine the non trading assets and may show investment properties and other investments and excessive bank and cash balances.
When the directors decide to close down a company and go down the solvent liquidation route they should always take tax advice from their accountant or tax advisor. It is always cheaper and quicker if there is just the balance at bank to be distributed to the shareholders.
It may sometimes be a good idea to extend the accounting period for the company, as a set of cessation accounts will be needed to obtain tax clearance. This is always something to consider.
Sometimes, instead of selling the asset it can be distributed ‘in specie’ by the liquidator and again this is something that can be discussed at the initial stages.
With regards to overdrawn director loan account (DLA), as this topic is very hot with HMRC the safest approach will always be to ask for the DLA to be repaid to the company, so that it can then be distributed in cash rather than in specie. It could mean the distribution in specie of the DLA may end up being treated as an income distribution and more tax will be paid by shareholders.
The other change in the Budget for insolvency was the return of the preferential status for HMRC – they will no longer be part of the unsecured creditors when a dividend is declared by the liquidator. Only time will tell how this affects the ordinary unsecured creditors.
We have a guidance sheet of solvent liquidations that answers some of the common questions and concerns that directors have. If you would like to receive a free copy then please email firstname.lastname@example.org. You can pass this to your clients if they are considering solvent liquidation to close down their company.
DCA Business Recovery offer free advice in confidence and will assess the situation and look for a solution to the problem. The dedicated ICPA Freephone Hotline on 0800 066 2540 is open 365 days a year (8am–8pm).
• Debbie Cockerton is a Partner at DCA Business Recovery
Accounting Practice Online is part of the ICPA, which is an organisation designed to provide support and guidance for accountants in practice. With 35+ practice specific benefits there has never been a better time to join. Take a look at the routes to membership today.