Potential trap for ESC C16

ESC C16 – which has facilitated the informal winding up of companies allowing shareholders to treat distributions in connection with the winding up as proceeds for capital gains tax purposes – is being enacted into statute with effect from 1 March 2012.

Under the new legislation there will be a cumulative cap on distributions by the company in the course of winding up of £25,000. Below that figure the distributions will be treated under capital gains tax rules, but above that figure all distributions will be taxed as dividends.

The CIOT have identified an issue where:

  • The winding up straddles 1 March 2012;
  • ESC C16 has been applied to distributions by the company before that date;
  • There are further distributions totalling less than £25,000 after 1 March 2012; but
  • The total distributions are more than £25,000.

In this situation, HMRC currently take the view that the distributions after 1 March 2012 will be taxed as dividends, although discussions between the CIOT and HMRC are on-going.

Where you are currently dealing with a C16 winding up and total distributions will exceed £25,000, you should ensure that all distribution are made before 1 March 2012.

For further information please call our Tax Desk on 0845 4900 509 and ask for Paul Howard