CGT or Dividend

[OrangeHopper]

I closed down my company and received a final dividend of just over £3000 in the 2020/2021 tax year.

So when I come to complete my tax return, do I put this last dividend in the same Dividend section that I have used for all previous dividends or am I supposed to use the Capital Gains Tax section even though it talks about amounts in excess of £12000?

Thanks in advance from a long absent member.

[jamesbrown]

If you received a dividend, then it's a dividend and you add it to the rest of your dividends for the tax year.

You will know whether or not it was a dividend, because you will have dividend paperwork if it's a dividend.

If you struck off the company (DS-01) and distributed the final amount below £25k (i.e., £3k), then it's a capital distribution, but you probably didn't do that.

[OrangeHopper]

The company was struck off so it was the final distribution of the retained profits.

I am assuming this is the subject of CGT but am not sure what to do since it was a small amount (in relative terms) as far as the tax return is concerned.

[jamesbrown]

In that case, it's a capital distribution, not a dividend distribution, and any amount above the annual CGT allowance (and below £25k) would get a reduced rate of CGT via BADR but, in your case, the amount is £3k, which is well below the annual allowance (assuming you don't have other capital gains) and you should not have any additional tax to pay. Really, though, you should pay someone to do your SATR for you (if you don't know what you're doing) because then it will be done accurately.

[OrangeHopper]

Thanks for the advice.

Let's just say that I have been doing tax returns for over 30 years and this is the first time I have had to consider CGT. As a result, I thought it appropriate to seak advice on here.

[JHamp82]

Thanks for the advice.

Let's just say that I have been doing tax returns for over 30 years and this is the first time I have had to consider CGT. As a result, I thought it appropriate to seak advice on here.

I would treat this as capital distribution and assuming you have no other gains to report it will be tax efficient too however I'd be careful with this as you may be caught by a legislation called TAAR.

Visit https://www.gov.uk/hmrc-internal-man...anual/ctm36305 for more information on this.

[jamesbrown]

I would treat this as capital distribution and assuming you have no other gains to report it will be tax efficient too however I'd be careful with this as you may be caught by a legislation called TAAR.

Visit https://www.gov.uk/hmrc-internal-man...anual/ctm36305 for more information on this.

The TAAR doesn’t apply in these circumstances because the OP performed a simple strike off with less than £25k distributed. It only applies to formal liquidations.

[Lance]

The TAAR doesn’t apply in these circumstances because the OP performed a simple strike off with less than £25k distributed. It only applies to formal liquidations.

something I've been considering as part of PlanB/C..

If I sell my LTD. to a parent company (valued at the retained profit), and become a director/shareholder of the parent company, I believe that I don't have any TAAR restrictions as the company wasn't liquidated. Is that true?

[JHamp82]

The TAAR doesn’t apply in these circumstances because the OP performed a simple strike off with less than £25k distributed. It only applies to formal liquidations.

As far as I understand, as per ITTOIA05/S396B/404A it does apply. In the legislation there isn't any difference in MVL where retained profits are above 25k or simple strike off where retained profits are less than 25k.

The main objective of this is to prevent individuals receiving capital distributions and pay capital gains tax(if any) instead of dividends and pay income tax.

If what you said was correct then this will be open to abuse because this would mean individuals can take advantage of CGT tax instead of dividend tax each year, by closing their company and opening up another one every year?

see below example from HMRC


Example

Mr J is a dance instructor who runs his business through his own company. At the end of each year, instead of paying himself a dividend (which would be liable to Income Tax), Mr J winds up his company and receives the profits as a distribution in a winding up, liable to Capital Gains Tax. He then immediately creates a new company and continues his dance instruction business

This practice is often known as ‘phoenixism’ (because the new company rises from the ashes of the old).

source : https://www.gov.uk/hmrc-internal-man...anual/ctm36305

[jamesbrown]

You understand incorrectly. The TAAR applies explicitly to distributions made on "winding up" aka liquidating, not "striking off". Even your example is clear about that.