Shareholders might wish to dissolve a small company for a number of reasons, from insolvency through to situations where the company, although solvent, has ceased to trade and no longer serves a useful purpose.
Where a dissolution is contemplated, it is important for the directors, shareholders and other stakeholders to understand the potential tax impacts, as well as taking advice on the broader legal and financial implications.
From a tax perspective, the default position is that distributions by a company are normally treated as income distributions for income tax purposes, as opposed to capital distributions. The distinction is important because income tax rates are generally more expensive than capital gains tax rates, sometimes considerably so.
However, since 2012, where the assets of a company are less than £25,000 in total, a pre-dissolution distribution of those assets can be taxed under the capital gains tax regime. Thus, a solvent company with a limited amount of assets can potentially be wound up in a tax efficient way, without the need to appoint a liquidator. Distributions that are taxed under the capital gains tax regime may also attract Entrepreneur's Relief (provided the appropriate conditions are met), reducing the rate of tax on any taxable gain to as little as 10%.
Where the assets of the company exceed £25,000, however, a pre-dissolution distribution of those assets would be taxed under the income tax regime unless the company has entered into a formal liquidation.
A formal liquidation does involve additional cost, so shareholders wishing to dissolve a solvent small company which has significant assets (in excess of £25k) should therefore consider whether the tax savings that may be achieved by having the distributions taxed under the capital gains tax regime, rather than the income tax regime, justify this extra cost.
It is also important to appreciate that where a small company distributes assets to a shareholder and the two parties are "connected persons" (as defined with the Taxation of Capital Gains Act), then a tax charge may also be triggered within the company, potentially leading to effective double-taxation. A further discussion of this topic is outside the scope of this article.