Change introduced to stop individuals ‘storing up’ profits in one company, winding it up and paying a reduced rate of CGT before starting again with a new company
MORE than double the usual volume of solvent companies were wound-up in March 2016 as company directors reacted to a change in the tax rules introduced in April, insolvency trade body R3 found.
March saw 2,663 solvent liquidations, over two-and-a-half times more than the previous record of 992 in April 2015. The monthly average for the 12 months prior to March 2016 was 768.
From 6 April, directors winding up a solvent company are prevented from claiming entrepreneurs’ relief from the capital gains tax (CGT) due on any gains if they continue to work in the same trade as that company in the next two years.
The change was introduced to stop individuals avoiding income tax by ‘storing up’ profits in one company, winding it up and paying a reduced rate of CGT before starting again with a new company.
Andrew Tate, R3 president said: “The scale of the spike in solvent liquidations is a surprise. We expected there to be an increase as the clock counted down, but not one as big as this.”
“There will have been a mixture of different types of companies being liquidated, including those companies owned by those targeted by the rule. However, some genuine entrepreneurs may have had to accelerate their retirement plans to avoid being hit by the tax change.”
R3 has previously warned that the rule change may have unintended consequences for entrepreneurs approaching retirement who needed to wind-up their company.
Tate added: “Very often, retiring entrepreneurs who are winding up their company but selling or passing on their business will have to stay involved for a while to make the handover easier. Their presence as a consultant might be reassuring for customers, for example.”
“Obviously, this means they have to stay involved in the same line of work within the two year timeframe.”
Entrepreneurs’ Relief on Capital Gains Tax sees the tax charged at 10% rather than the standard rate.
Numbers of solvent liquidations have been abnormally high since the tale end of last year when the new rules were announced. Since the monthly records began in March 2014, just five months have seen over 900 solvent liquidations – December 2015-March 2016 accounted for four of these.
Solvent liquidations accounted for 66% of all liquidations in March, compared to an average of 35% over the last two years.