Although selling your company is usually the most desirable outcome after years of hard work, it may not always be possible – especially if the business has stopped trading. Owners of companies that just want to wind up and extract residual cash at a low rate have benefited from what is known as the Extra Statutory Concession (ESC) C16. For years this concession has helped company directors to informally wind up their businesses while reaping the tax benefits of doing so.
This concession has been applicable to solvent firms ceasing to trade through the informal winding-up process and has helped shareholders extract the companies’ assets without having to pay 25 per cent or more in income tax on the cash. Those who have assets tied up in their business have been realising the benefits of the C16 concession and have instructed their accountants to help them through the process in large numbers, ensuring they reap the benefits of Entrepreneurs’ Relief.
However, as of 1 March 2012, the ESC has been incorporated into legislation that automatically allows the informal winding-up process to take place, but also introduced a £25,000 limit on the assets that can be extracted from a business and still be classed as capital rather than income.
In brief, the informal process allows a solvent business to be wound up without the use of an official liquidator. In addition, the assets also pass to the shareholders as capital distributions rather than as income distributions. This means that the assets received are taxable as capital gains rather than income.
Providing entrepreneur’s relief is available, most company directors will be able to extract the assets while paying just 10 per cent tax, as opposed to at least the 25 per cent that would be payable if the assets were to be taxed as income.
There are now, however, some restrictions and limits in place that will affect whether a business owner opts for the informal winding-up process. For example, as of 1 March 2012, if the assets are distributed to shareholders before its dissolution, only the first £25,000 will be classed as capital. If the assets being extracted come to more than £25,000, a formal winding-up process should be deployed to ensure that the money could be extracted as capital, rather than income.
One of the most obvious benefits of the informal process is the reduction of professional costs involved, and a charge of just £10 from Companies House. Those who opt for the official winding-up process, however, will have to pay considerable professional costs and the process is likely to be more complicated and time consuming.
Most business owners who are considering winding up their companies, and have assets of more than £25,000 that they want to extract, will need to weigh up the benefits of the capital classification against the costs and complexities of the formal winding-up process. Those with in excess of £25,000 to extract can still opt for the inexpensive, informal process, but the shareholders will be liable to pay income tax on the entire amount being extracted.
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