When a company reaches the end of its useful life, it can be formally liquidated – which carries a cost in professional fees – or dissolved more informally under the Companies Act. The method chosen can affect the tax treatment of any surplus assets to be distributed to the shareholders.
Under a formal liquidation all surplus funds and the return of share capital to shareholders is treated as capital in their hands – liable to capital gains tax (CGT), possibly at only 10%. If an informal dissolution is used, and the shareholders receive distributions totalling more than £25,000, the entire amount is taxed as a dividend subject to income tax. Where the distribution is £25,000 or less, it will be taxed as capital subject to CGT.
The tax rates are so complicated that it’s important to take advice on which treatment you would prefer, and then on which tax treatment is possible.
If you have large accumulated profits in a company that you are hoping at some point to extract subject to CGT rates rather than income tax, you will need to consider alternative plans to minimise the tax charge.