Exchequer Weblog

It is often not quite as easy to close down a limited company, as it is to set one up. Where a company has surplus assets it is often beneficial for tax purposes for those assets to go back to the shareholders in the form of a capital gain rather than as dividend income in order to take advantage of CGT exemptions and reliefs.

The formal way of doing this to appoint a licensed insolvency firm to deal with the assets and liabilities but this can be expensive. However, an alternative to consider is an informal procedure called Extra Statutory Concession C16 (ESC C16) that can be used. This is a concession applied by HMRC, which allows the remaining assets and cash in the company to be distributed to the shareholders without a liquidator being involved.

Where ESC C16 is used the distributions made to the shareholders are treated as capital, so capital gains tax is payable on any gains. In many situations, the amounts are small so the gains are covered by the individual’s annual capital gains exemption (£9,600 for 2008/09) so no tax is payable at all. However, before the Taxman will give permission for ESC C16 to be used the company secretary and its shareholders must give HMRC the following assurances:

The company:

• - does not intend to trade or carry on a business in future;
• - intends collecting its debts, paying off its creditors and distribute any balance of its assets to its shareholders; and
• - intends to ask Companies House to strike it off the register of companies.

The shareholders and the company must agree to:

• - provide all information to HMRC such as company tax returns and accounts to determine any tax liabilities, and pay any corporation tax due on income or chargeable gains and
• - the shareholders will pay any tax due in respect of any amounts distributed to them out of the company.

One word of warning; any aggrieved creditors of the company can object to the company being struck-off and may ask for it to be reinstated if it has already been struck-off. Thus if there are any live claims against the company, a formal liquidation is usually the best way to solve the problem.

If you run your own company one way to share the dividend income around the family is to ensure that each family member owns some shares in the company, so they can receive dividends voted on those shares. This can help to reduce tax bills.

The individuals need to use their own money to subscribe for the shares, or they must receive the shares as a gift from another shareholder. However, if you give shares to your children who are aged under 18, the income the children receive from those shares will be taxed as your own (unless income isn’t over £100/year). If the children use their own money to acquire the shares it must be clear that the funds did not come from you. Even if this is clear, the Taxman may argue that as the controlling directors of the company you have placed the dividends in the hands of your children by arranging for shares to be issued in their names. In that case the dividend income will still be taxed on you rather than on your children.

Giving shares to your spouse can be effective for tax purposes, although the Government is determined to clamp down on the manipulation of dividend income by family companies, which they see as tax avoidance. However, the proposed income shifting legislation that was to deal with family dividends has been shelved. So for now this type of planning can work but it may re-emerge as an issue in the future.

It may be you want family members to receive dividends in proportion to the effort they put into the business, perhaps to guard against income shifting legislation should it come into force. One way to try to do this is to issue various classes of shares, such as: A-shares, B-shares, and C-shares, known as alphabet shares. A different level of dividend is voted for each class of shares. The shares may also have different rights with regard to voting and assets allocated on the winding up of the company. However, issuing alphabet shares is not completely straight-forward, particularly if the shareholders also work for the company, so please ask your financial adviser or accountant for advice.

In these difficult times it makes sense to share out the family income as much as possible so all the family’s tax free allowances are fully used. You can’t redirect some of your pre-tax salary to your family members, but you can give your spouse or grown up children assets that will generate income. A let property is ideal for this.

First check how your let property is owned. Is it held…

• - just in your name, as ‘joint tenants‘ meaning the owners hold equal shares in the property, or
• - as ‘tenants in common‘, when the owners may hold different proportions of the property, say 30% and 70%.

Generally property owners are taxed on the proportion of the property income that relates to their interest in the property. However, married couples are automatically taxed on half the income each, unless the Taxman is told otherwise.

Half the profits from the property may not use up all of your spouse’s personal allowance. To put more of the property income in their hands to help save tax you need to change the way the property is owned so your spouse owns a larger proportion of the property. To do this you can ask a solicitor to change the ownership so the property is held as tenants in common in the shares you want.

Once this is done you need to tell the Taxman who owns what share in the property by completing Form 17 and sending it to your tax office. The new ownership proportions will apply for tax purposes from the date of change as long as the Taxman receives the signed Form 17 within 60 days of the change in ownership.
You won’t have to pay capital gains tax when you transfer a share in the let property to your spouse if this is done in a tax year when you are living together.

If you are not married to your partner, the gift of a share in property is treated as a sale at market value and you may have to pay capital gains tax on that deemed sale. The same applies if you give a share in a property, or a whole property, to your children.

If the mortgage secured on the let property is also transferred from the name of one person into the names of both of the owners, the new owner may need to pay some Stamp Duty Land Tax if the amount of mortgage transferred is above stamp duty limits. However, the new owner needs to be included on the mortgage deed so they can claim part of the mortgage interest as a deduction on their tax return against their portion of rents received from the property.

It’s more important than ever to get your books and records into your accountants in plenty of time because from 1st February 2009 private companies that fail to file their accounts on time will face increased fines. The maximum fine will be imposed after 6 months rather than the current 12 months. The fines will also start to increase after just one month’s delay instead of three months.

The new penalties for private companies are as follows…

• Less than 1 month late: £150
• More than 1 month but less than 3 months: £375
• More than 3 months but less than 6 months: £750
• More than 6 months: £1,500

The permitted time limit for filing accounts also comes down from 10 months after the year end to 9 months for accounting years starting on or after 6 April 2008. In addition where there was a failure to comply with filing requirements in relation to the previous financial year (and the previous financial year had begun on or after 6th April 2008), the penalty will be double that shown above.

As a consequence of these new rules Companies House can expect its late filing penalty income from private companies to soar to £100 million in 2010, up from the 2007 figure of £47.4 million.