Hi All,
Need a sounding board/other peoples thoughts on winding up my business and the amount of tax to pay.
So, we will start the winding up process in September, we have the winding up company narrowed down to 2, and have spoken to them, but we then have the question of how much tax to pay. I have had a conversation with our accountants, who can warn, and offer scenarios, but really cant guide on a decision.
The complexity is, that a few years ago, we invested some of the company money in a Buy to Let rental property (interest rates were almost at zero, commercial was a very risky proposition, so rental gave a reasonable rate of return). The rental property was sold at the start of last year, so now its just the company sitting on a large pile of cash.
I will copy some of the thoughts of my accountant below (the ones I received by email), but in the discussion, it came down to two choices with 3 possible outcomes....
Option 1 : Dont take the ER/BADR (Business Asset Disposal Relief) - which means we CGT pay tax of say, for conversation, around £80,000 (ouch)
Option 2 : We claim ER/BADR - which means we means we CGT pay tax of say, for conversation, around £35,000 (still ouch, but less so). But, option 2 means it could either be accepted by HMRC and closed fairly quickly and neatly, and the CGT is at (the example) £35k, or they could challenge it, which means:
1) It would take a lot longer to wrap it up
2) We would have to pay costs to fight HMRC in court to argue our case (we would argue we were pushed out of our industry by IR35 changes etc) - example court costs he quoted to me was £10,000, which *could* be covered by tax insurance
3) If we lose, with penalties and interest, the tax bill would rise to (for example) £100,000
4) If we win, we would still have to carry insurance and have HMRC on our shoulder for 6+ years as they may change in the dim and distant future, which of course could mean a large(er) tax bill in the future
So it seems the options are pay large amounts of CGT and sleep at night, or pay the less CGT and all the risks that come with this.
The thought of overpaying tax by that much makes me feel sick (we have paid so much tax over the years in PAYE and Corp tax). But the prospect of court battles and massive tax bills in the future makes me feel the exact same way.
Has anybody else gone through this? Other peoples thoughts?
Some more comments from our accountant....
On recent Member Voluntary Liquidations (MLV) we are usually instructed to prepare accounts up to the date of trade ceasing and then passing those figures to the liquidators, the cleaner the better.
Re the winding up we are finding that the liquidators are on MVL’s settling almost immediately some 75% of available funds, the maximum I believe they can settle, and are warning that the court process is then taking some considerable time to work through to release the rest.
Re CGT again this is never certain until the event, but amount of cash the company has, you are possibly looking at a 10% charge assuming a claim for business asset relief, but I would caveat the issue that it is all cash assets being liquidated and not trading assets so a challenge as to it being viewed as a dividend distribution at possibly 32.5% is costly. In cases we have seen it is has been the liquidators who have obtained clearance from HMRC that it is a capital distribution and not dividend.
The stance taken by HMRC on larger cash liquidations prior to Covid and the change to Business Asset Disposal Relief, was fairly relaxed and lenient in that if the non trading income, the rental income in the case of your company, did not exceed 20% of the annual profits, which it clearly did not, they would have accepted the claim for a 10% charge and on occasion where the 20% was exceeded accepted the claim.
However there have been fairly clear indication that the fairly relaxed approach is now being tightened. Whilst you are well within the 20% parameter of rents in proportion to profits the proceeds of sale form nearer 50% of the cash available on distribution, hence my caveat an worse case advice.
Need a sounding board/other peoples thoughts on winding up my business and the amount of tax to pay.
So, we will start the winding up process in September, we have the winding up company narrowed down to 2, and have spoken to them, but we then have the question of how much tax to pay. I have had a conversation with our accountants, who can warn, and offer scenarios, but really cant guide on a decision.
The complexity is, that a few years ago, we invested some of the company money in a Buy to Let rental property (interest rates were almost at zero, commercial was a very risky proposition, so rental gave a reasonable rate of return). The rental property was sold at the start of last year, so now its just the company sitting on a large pile of cash.
I will copy some of the thoughts of my accountant below (the ones I received by email), but in the discussion, it came down to two choices with 3 possible outcomes....
Option 1 : Dont take the ER/BADR (Business Asset Disposal Relief) - which means we CGT pay tax of say, for conversation, around £80,000 (ouch)
Option 2 : We claim ER/BADR - which means we means we CGT pay tax of say, for conversation, around £35,000 (still ouch, but less so). But, option 2 means it could either be accepted by HMRC and closed fairly quickly and neatly, and the CGT is at (the example) £35k, or they could challenge it, which means:
1) It would take a lot longer to wrap it up
2) We would have to pay costs to fight HMRC in court to argue our case (we would argue we were pushed out of our industry by IR35 changes etc) - example court costs he quoted to me was £10,000, which *could* be covered by tax insurance
3) If we lose, with penalties and interest, the tax bill would rise to (for example) £100,000
4) If we win, we would still have to carry insurance and have HMRC on our shoulder for 6+ years as they may change in the dim and distant future, which of course could mean a large(er) tax bill in the future
So it seems the options are pay large amounts of CGT and sleep at night, or pay the less CGT and all the risks that come with this.
The thought of overpaying tax by that much makes me feel sick (we have paid so much tax over the years in PAYE and Corp tax). But the prospect of court battles and massive tax bills in the future makes me feel the exact same way.
Has anybody else gone through this? Other peoples thoughts?
Some more comments from our accountant....
On recent Member Voluntary Liquidations (MLV) we are usually instructed to prepare accounts up to the date of trade ceasing and then passing those figures to the liquidators, the cleaner the better.
Re the winding up we are finding that the liquidators are on MVL’s settling almost immediately some 75% of available funds, the maximum I believe they can settle, and are warning that the court process is then taking some considerable time to work through to release the rest.
Re CGT again this is never certain until the event, but amount of cash the company has, you are possibly looking at a 10% charge assuming a claim for business asset relief, but I would caveat the issue that it is all cash assets being liquidated and not trading assets so a challenge as to it being viewed as a dividend distribution at possibly 32.5% is costly. In cases we have seen it is has been the liquidators who have obtained clearance from HMRC that it is a capital distribution and not dividend.
The stance taken by HMRC on larger cash liquidations prior to Covid and the change to Business Asset Disposal Relief, was fairly relaxed and lenient in that if the non trading income, the rental income in the case of your company, did not exceed 20% of the annual profits, which it clearly did not, they would have accepted the claim for a 10% charge and on occasion where the 20% was exceeded accepted the claim.
However there have been fairly clear indication that the fairly relaxed approach is now being tightened. Whilst you are well within the 20% parameter of rents in proportion to profits the proceeds of sale form nearer 50% of the cash available on distribution, hence my caveat an worse case advice.
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