Recent news has come to light regarding the level of taxation applied to company owners who decide to sell or wind up their company. The new government rulings will come into effect on the 6th April 2016.
What do these new rules mean?
Chancellor George Osborne recently announced that the government will remove tax breaks on gains when companies are sold. Taxation on distributions arising from solvent liquidations could increase from 10% to over 38%. This means that business owners may be in for a surprise when winding up their business, if they’re expecting the 10% tax rate instead of the increased rate of up to 38.1%.
The government’s reasoning for this new change is that they deem it unfair that director shareholders can shelter income (profits) in their companies and when they decide to sell or wind up their business, the accumulated amount can be taken as capital. Generally, capital is taxed at lower rates than income, resulting in the director shareholder receiving an unfair tax advantage.
What can business owners do?
If you’re the owner of a small or medium sized business, then you’re likely still reeling from the news that the dividend tax rate will be increasing by 7.5%. So, this is a double whammy of bad news for many business owners.
If you are a business owner who has built up a substantial cash reserve in your company with the intention of extracting them as capital, what can you do? The truth is, there are no easy escape routes or ‘loopholes’. You can however, ask your accountant to advise whether or not you’re likely to be affected by these new rulings and discuss possible tax efficient alternatives.
Remember, the rules do not come into effect until 6 April 2016, so if you are going to be affected by these new rulings, you may be able to take some of the cash before the new rules come into effect. While the rulings don’t come into effect until April 6th, we strongly recommend you take action well before this date. Time really is of the essence, and there’s no time like the present. So, if you intend to exit your company as profitably as possible, then please contact your accountant as soon as possible to discuss your options.
Please contact Philip Hunt, on 01603 616300 or email philip.hunt@astonshaw.co.uk for advice.
