Chancellor of the Exchequer, Rishi Sunak, has recently implied that Capital Gains Tax (“CGT”) rates will come under increased scrutiny, as the Government attempts to fill the budget deficit caused by the ongoing COVID-19 pandemic. With the Autumn Budget soon approaching, these reforms may now just be a matter of weeks away!
The highest rate of CGT for individuals on the disposal of company shares is currently 20%, a significant difference when compared to Income Tax Rates of up to 46% in Scotland. This 20% CGT rate can however be reduced even further to just 10%, where the conditions for Business Asset Disposal Relief (“BADR”) are satisfied. It is therefore understandable why CGT rates may be one of the first areas of tax to be reformed by the Government.
Now is therefore the time for anyone holding shares in a company to consider their options, particularly those with shares in their own Personal Service Company (PSC). Between the potential CGT rates increase, and the upcoming 6 April 2021 changes surrounding IR35 off-payroll reforms (see our webpage here), this decision is even more timely for owners of PSC’s.
Options to be considered to qualify for capital gains tax treatment include:
- Outright sale of company shares
- Informal strike off of the company
- Members Voluntary Liquidation (“MVL”) of the company
Take for example a Limited company wholly owned by Mr Smith. Mr Smith has operated the company for many years as his PSC, offering his expertise to the financial sector on a contractor basis. With upcoming changes surrounding IR35, Mr Smith decides to cease and liquidate his company. On review, Mr Smith qualifies for BADR and therefore, for example a £200k cash distribution made to Mr Smith via liquidation of the PSC, Mr Smith could potentially currently pay just less than £20k of CGT to HMRC.
A MVL is a quick, tax-efficient and relatively straightforward process to wind up a solvent company and distribute the assets to its shareholders. In this example, Mr Smith would complete a declaration of solvency, and then pass the necessary resolutions to appoint a Liquidator. This would usually all be done on the same day and our restructuring and recovery team have the necessary expertise to draft all required documents and act as Liquidator in any MVL appointment.
With PSC’s, the liquidator can often make an interim distribution of the cash funds held by the Company to the shareholders within weeks. An additional benefit to the MVL process is that assets can be distributed on an in-specie basis, without the need to convert these to cash. For example, if Mr Smith had purchased a vehicle through his PSC that he wanted to continue to use, then this could be directly distributed by the Liquidator to Mr Smith rather than him having to purchase it from the Company.
It is currently anybody’s guess exactly what the position will look like following the Autumn 2020 Budget, however time is definitely of the essence when considering your options pre-October 2020. AAB have a wealth of experience in assisting shareholders realise the value of their shares process from start to finish, from acting as liquidators of the company, undertaking reviews of BADR eligibility, through to completion of the BADR claim via Self-Assessment Tax Returns.