Tightening the tax rules on shareholder exit

Company owners often aim to take profits from their companies under the Capital Gains Tax rules (“CGT”) as sale or liquidation proceeds rather than as dividends, due to lower CGT rates and Entrepreneurs’ Relief.

The Autumn Statement announced a tightening of the anti-avoidance rules which HMRC use to reclassify such capital receipts as dividends, giving the shareholder a higher tax bill.

The proposed tightening of the rules focuses on the following events:

  • selling shares to a third party;
  • distributions on a winding up;
  • repayment of share capital; and
  • share buybacks.

Third party sales

These anti-avoidance rules do not usually apply to genuine sales to a third party. However, HMRC are concerned that shareholders may resist paying dividends and build up cash in the company, increasing the eventual share sale proceeds so they can “sell” those profits in a capital form.

Distributions on a winding up or liquidation

Distributions made on a winding up are currently taxed under CGT.  HMRC have identified three areas of concern:

  • profits are retained in the company rather than paid out as dividends, so as to receive those profits under CGT as a distribution on a winding up;
  • “Phoenix companies”, where a company is wound up to access profits under CGT but the same or similar trade is then carried on by the shareholders in a new form. HMRC intend to introduce a targeted anti-avoidance rule where there is a tax avoidance motive;
  • a separate company is used for individual projects, such as property development projects, and is liquidated after each project allowing the profits to be taken under CGT rates.

Repayment of share capital

Repayment of share capital originally subscribed by the shareholder is usually not taxed as a dividend.

It is currently possible to use a new holding company introduced by a share for share exchange to increase the amount that can be returned as share capital to the shareholder under CGT.  HMRC are seeking to counter this planning.

Share Buyback

A company buy back of shares is taxed under CGT if certain tests are met.  These tests can allow the shareholder to retain a significant interest in the company after the buy-back.  HMRC is considering changing the rules so that the shareholder will have to sell a larger proportion of their shares in order to get CGT for the buyback by the company.

These proposed new rules could significantly limit company owner’s ability to extract funds under capital gains tax.  If you are considering a share capital transaction, it may be beneficial to complete this before 6th April.


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