For example, a shareholder who pays higher rate tax receiving £100,000 on the liquidation of his company would pay income tax of £32,500 (32.5%) if the anti-avoidance applies, whereas Capital Gains Tax would be just £10,000 (10%) if Entrepreneurs’ Relief is available.
Consequently, new stricter rules now apply to transactions dated on or after 6 April 2016. For the new anti-avoidance rules to apply the company being wound up must firstly be a close company and the individual must have held at least a 5% interest in the company (ordinary share capital and voting rights).
Can we obtain advance clearance prior to the liquidation?
Accountants and tax advisers requested that the new anti-avoidance rules should provide a formal clearance procedure prior to the transaction, thus providing certainty as to whether or not the payment would be taxed as income or capital.
This can result in an otherwise capital receipt being taxed as income.
In particular, from 6 April 2016 the definition of a TIS is extended to include: A Targeted Anti-Avoidance Rule (TAAR) has also been introduced to target ‘phoenixing’.
Only partners who receive a liquidating distribution of cash may have an immediate taxable gain or loss to report.
When a business operates as a partnership, the partners each report a percentage -- which is usually the same as their percentage of ownership -- of annual earnings on their personal returns.
As a result, the tax effects of a partnership that makes liquidating distributions only impacts the partners who receive them.
A loss results when the liquidating distribution is less than the partner's basis in the partnership.
Partners, however, can only take a loss on their returns if it's solely the result of a liquidating distribution of cash, outstanding partnership receivables or inventory items.