CheckLists.Tax (beta)
G17. Liquidation
INCOME TAX
Distribution in winding up treated as income (phoenixing)
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Transfer of assets abroad
- Distribution in winding up as a benefit for the purposes of the benefits charge
- Query whether a distribution in winding up by a company to an individual shareholder can be a benefit for the purpose of matching income to benefits under ITA s.731.
- Shareholders have a right to receive dividends, if declared (Laird Group plc §36).
- Distribution in a winding up is a payment that "merely gives effect to the shareholders' rights; they receive only what is already theirs" (Laird Group §37).
- Compare with a sale of the company: receipt of the share sale price is not a benefit.
- Kessler argues it should be regarded as a benefit.
- Otherwise ToAA is avoided by the shares being held by a non-transferor and receiving the company's income during a winding up.
- But then both receipt of the shares from a trust + capital received on a winding up would be a benefit (unless, as Kessler suggests, one imposes some sort of benefit 'franking' analysis).
Effect of there being a benefit
- Note that in applying the ToAA benefits charge the transferor does not need to be an individual (i.e. the point in Fisher concerning transfers by companies rather than individuals does not arise - see Fisher, §87).
- See i9. Trust benefits.
Legislation:
Cases:
Laird Group plc v. IRC [2003] UKHL 54;
Fisher v. HMRC [2023] UKSC 44;
HMRC manuals:
Commentary:
See also:
Transactions in securities
- Distribution in a winding up is a transaction in securities
- See ITA 2007, s.684.
- Query whether HMRC might seek to apply the code if the company has been retaining profits in excess of its commercial needs.
- Ebsworth v. HMRC - T and spouse owned a company but wanted to separate. Newco (owned solely by T as a result of spouse transferring shares to him) purchased the business of the old company, which was then liquidated. HMRC accepted capital treatment for spouse but not T.
- Held: no income tax advantage or if there was, it was no in consequence of the transfer of shares in Newco.
Legislation:
Cases: Ebsworth v. HMRC [2009] UKFTT 199 (TC);
HMRC manuals:
Commentary: TCCR, W6.2.12;
See also:
CAPITAL GAINS TAX
Matching gains to benefits (s.87 + s.89(2) + Sch 4C)
- Distribution in a winding up as a capital payment for the purposes of matching
General position
- Query whether a distribution by a company to a shareholder can be a capital payment for the purpose of matching gains.
- Capital payment includes a payment, transfer of assets "and the conferring of any other benefit" (s.97(2)).
- Arguably not a benefit:
- Shareholders have a right to receive dividends, if declared (Laird Group plc §36).
- Distribution in a winding up is a payment that "merely gives effect to the shareholders' rights; they receive only what is already theirs" (Laird Group §37).
- But it does seem to be a payment or transfer of assets.
- Perhaps it is a transaction at arm's length (s.97(1)(b)).
- HMRC accept that this can apply to connected party transactions.
Exclusion for income
- For UK residents, a payment is excluded if it is chargeable to income tax (s.97(1)).
- No exclusion if it is chargeable to corporation tax.
- UK resident companies can be taxed on s.87 gains.
- For non-residents, a payment is excluded if it is received as income.
- Payment in winding up normally not income/chargeable to income tax (albeit see the phoenixing TAAR).
Value of the capital payment
- The amount of a capital payment which is an 'outright payment of money' appears, implicitly, to be the amount of the payment (s.97(4)).
Consequences
- If a distribution in a winding up is/can be a capital payment
- If the distributing company is controlled by a trust, the shareholder might be treated as receiving the payment from the trust, to allow matching.
- If the recipient is a UK resident company, it may be taxed on matched gains.
- If the recipient is a non-UK resident company, the capital payment may be treated as received by its own participators.
- See detailed notes on matching in i9. Benefits provided by trust.
Company makes capital payment to trust which 100% owns company (generally ignore)
- HMRC say: "In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of TCGA 1992 Sch 5 para 9(3) and are not treated as capital payments within TCGA 1992 s 97." (SP5/92, §18)).
- Query what the position is if the trust owns 99% of the company, and why - Kessler suggests capital payment to the extent of trust non-ownership, at least in some cases.
Legislation: TCGA 1992, s.96, s.97.
Cases:
Laird Group plc v. IRC [2003] UKHL 54;
HMRC manuals:
Commentary:
See also: