Closing company - capital gains v income - if not claiming ER? Closing company - capital gains v income - if not claiming ER?
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  1. #1

    Nervous Newbie


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    Default Closing company - capital gains v income - if not claiming ER?

    Hi all,

    Apologies if this has already been answered as I imagine it's a fairly common question but I couldn't find the exact answer I was looking. Perhaps I'm just not very good at searching the forums!

    My current situation is I have two Ltd companies:

    Old company I was operating as a contractor through with previously and have about 60k there. I am no longer contracting with this and is now operating effectively as an investment company.

    New company is now active for my contracting work.

    The reason for creating a new company was my accountants informed me it would be easier to do it this way as I wanted to switch to a new partner for the secondary shareholder. Previous partner's other income is much higher than new partner's so it makes sense from a tax perspective.

    Question is this:

    As I'm still trading in the same capacity I'm not looking to claim Entrepreneurs Relief (ER) IF I closed down the old company but can I extract the money from it as capital gains anyway? Or would I be taxed on it as income?

    There is an important additional consideration which is I will have to pay a significant proportion of my income to my ex-wife. She's already bled me to death in a very generous settlement in her favour, while my personal financial situation is still not great. Hence I'm trying to be very careful about avoiding increasing my income for the time being.

    Much appreciate your advice on this.

    Look forward to hearing from you.

    Cheers :-)

  2. #2

    My post count is Majestic

    northernladuk's Avatar
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    but can I extract the money from it as capital gains anyway? Or would I be taxed on it as income?
    How come your accountant can't help you with this?

    Information your comment regarding trading company.

    Trading or investment company
    Last edited by Contractor UK; 25th May 2019 at 14:25.
    'CUK forum personality of 2011 - Winner - Yes really!!!!

  3. #3

    Super poster


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    Eligibility for capital distribution and ER are two different things.

    If old company hasn't been trading for a while then it's likely it doesn't qualify for ER (I think the time limit is 12 months), as you say.

    To qualify for a capital distribution you need to not be caught by the targeted anti abuse rule (TAAR) for "phoenixing". Given you have started a new company while the old one is running, likely transferred all non-cash assets to the new company (including any equipment, trade and goodwill) and are still performing the same trade as the new company its almost certain you will be caught by this rule and therefore not qualify for a capital distribution if you liquidate.

    So with all that said, IMO it looks like your best option is:

    1) Continue trading through NewCo but leave any retained profits alone.
    2) Pay yourself each year up to the higher rate tax threshold from profits in OldCo until those profits have been used up.
    3) Close down OldCo
    4) Start paying yourself from NewCo again as usual.

    Then, in the future, if you close down NewCo and take a break from contracting for a couple of years you may be eligible (under today's rules at least) to extract any reserves from NewCo as a capital distribution AND claim ER.

  4. #4

    Contractor Among Contractors


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    I'd mostly agree with TCP. Sounds like Oldco has become an investment one. Especially if it's been this way for a little while now, then realistically ER would be out of the window.

    Personally I'd be a bit more relaxed/optimistic than TCP re capital gains tax though. It's a bit grey, but if the shareholders of Newco are different to shareholders of Oldco, and it sounds like you'd be happy justifying that that was the primary reason for now setting up Newco, I'd be happy arguing the case if it were our client in that situation. However, I do agree it's a risk. Ignoring motives, sounds like Newco would be doing a similar trade to Oldco, and there would likely be a tax benefit.

    Without ER, it's mainly the annual exemption that helps keep CGT lower. You may find that the tax differential, especially once factoring in costs of an MVL, aren't that big anyway.

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