Capital Reduction instead of Members Voluntary Liquidation
Tax Benefits from Capital Distributions - Capital Reduction - Sections 641 - 653 The Companies Act 2006
You do not necessarily have to go to the trouble of a Members Voluntary Liquidation to obtain the related tax benefits. A capital reduction exercise may be an option for you to consider.
Extracting cash from your company in a tax efficient way is very important now that income tax rates are so high whereas capital gains tax rates are much lower at 28% or even less at 10%, if entrepreneurs relief applies. One way for you to obtain such tax benefits is by considering a capital reduction.
Law regarding capital reduction
Section 641 of The Companies Act 2006 gives private limited companies the power to reduce share capital. This is done by passing a special resolution supported by a director's statement of solvency. Returning capital to the shareholder, which is in excess of the company's needs, can be a tax effective way to withdrawn funds from a limited company.
The solvency statement requires each director to confirm that the company's assets exceed its liabilities and that it will be able to pay its debts as they fall due in the following year. The statement must be in writing and all the directors must sign it. The members (shareholders) then pass a special resolution reducing the share capital within fifteen days of the directors making the solvency statement. The company must file a copy of the solvency statement with the Registrar of Companies, along with the special resolution, a statement of capital and a statement of compliance (and an updated print of the articles of association, if they have been varied as a consequence of the capital reduction) within 15 days of the members passing the resolution. If directors make a solvency statement without having reasonable grounds for the opinions expressed , they will be guilty of a criminal offence that carries a maximum penalty of two years in prison. Additionally they may find themselves personally liable for the unsatisfied company debts.
The resolution takes effect on registration with the Registrar. The resolution can provide for direct repayment to the shareholders or, less often, the transfer of the capital sum to reserves.
Capital Gains Tax
As well as CGT rates being much lower than income tax rates the amount actually taxed on you may also be further lowered because,
- CGT is payable on your capital gain not the proceeds distributed to you
- Your annual CGT exempt amount can be deducted from the gain.
- You might have other capital losses that you can set off against the gain.
It is also vital to obtain the necessary clearance from HMRC (under revised ESC C16 from 14 October 2011) to ensure that the distribution following the capital reduction is treated as a capital distribution rather than an income distribution.
Purnells have developed a guide to Members Voluntary Liquidations, which is available here, and should hopefully assist your understanding.