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Under the Extra Statutory Concession ESC C16, companies undertaking an informal striking off are able to distribute their assets to the shareholders and the shareholders could receive capital treatment on this distribution for tax purposes, which is usually a more tax efficient route than treating the distribution as income; provided that the share capital did not exceed £4,000. In December 2010 the consultation process was opened by the Government into the capital treatment of distributions made by companies undergoing an informal striking off procedure.
Many accountants and tax advisers were led to believe that the legislation was to be amended so that the distribution would only be treated as capital for tax purposes if the total distribution was no more than £4,000. Nothing was enacted into the Finance Act 2011 in this regard and many accountants were left "in the dark" on advising clients whether to undertake the information striking off procedure or the formal liquidation route.
The draft finance bill, published on 6 December 2011 includes clauses whereby capital treatment will be granted on distributions made under an informal striking off provided that the total distribution does not exceed £25,000. This will apply from 1 March 2012.
These clauses, when enacted, will ensure that, upon the informal striking off of smaller companies with net assets of £25,000, the shareholders will be able to receive the distribution as a capital asset paying the appropriate capital gains tax rate rather than as a dividend and paying tax on the distribution at their marginal rate of tax.
This means that anyone wishing to strike off a company with assets in excess of £25,000 and desire the capital treatment have to either:
• Act before 1 March 2012.
• Pay a dividend first to reduce the assets below £25,000.
• Undertake a reduction in share capital first to reduce the assets below £25,000.
• Enter into formal liquidation proceedings.
If you have companies that you wish to dissolve please get in touch as soon as possible.
Nigel Holmes, Corporate Tax Director
Call 01228690200 or email email@example.com
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