The Extra-Statutory Concession C16 enables limited company owners to distribute any remaining company funds during the winding up process to shareholders as a capital gain. To clamp down on perceived tax avoidance, a £25,000 cap will be applied to capital gains made after 1st March 2012.
In the past, the ESC C16 enabled limited company owners to extract any remaining profits in a tax efficient way, as a final distribution would be taxed as a taxable gain, subject to 18% (standard rate) or 28% (higher rate) CGT. Subject to eligibility, shareholders may also qualify for Entrepreneurs’ Relief on such a distribution – with a mere 10% tax rate.
The reasoning behind the concession was that the more generous tax allowance would compensate for the cost of appointing administrators to wind up a company. This cost has traditionally been estimated to be around the £7,500 mark. The concession also offers protection to creditors (including HMRC), who would be paid first under the ESC C16 route.
However, after a consultation period, the Government has passed The Enactment of Extra-Statutory Concessions Order 2012, which has turned the concession into legislation.
From 1st March 2012, only the first £25,000 of funds distributed to shareholders will be treated as a capital gain. Funds beyond this point will be subject to dividend tax.
Unsurprisingly, the news has been criticised by business groups, although it should be noted that HMRC originally planned to set the limit at £4,000.
If you are planning on winding up your limited company, you should consult an accountant who will be able to look at the most tax efficient ways of distribution remaining funds to the company’s shareholders.