Taper relief = legitimate tax saving?

[howdydoody]

I read somewhere there is a ruling that allows you to wind up your company and distribute the remaining capital but only pay tax on 25% of the capital.

I recall that you must have been trading for 3 years.

Is it true, and if so, what is the name of the ruling that allows this?

Does anyone have any more details on this? I did a search at hmrc.org but got so many hits I got tired going through them.

If this only applies when you wind up the company, is there anything to stop you doing this then creating a new company every three years?

[DimPrawn]

Speak to your accountant.

Yes, you can wind up the limited and withdraw the capital, subject to capital gains tax, which itself is reduced by taper relief.

I believe there is a rule that says the capital extracted must not exceed 100% of your annual profit. An accountant will know the details.

There is a fair bit of paperwork and the IR will scrutinise your tax affairs before approving the close down and dispersion of capital.

In theory you could do this regularly. Not sure if anyone here has done it more than once.

Personally I think it is probably a good idea to start afresh with a new limited every 5 or 6 yrs in this game.

[tacpot]

The ability to wind your company up and take a dividend as a capital distribution (= taxed as CGT rather than Income Tax) is a concession by HMRC. (It is called Extra Statutory Consession C16). You have to apply to your tax inspector to do this. (HMRC examine the situation as pe DimPrawn's description).

But it is worth doing because of the taper relief. This allows you to multiply the Capital Gain by 0.25 if you have held the shares in your company for more than 2 years. You then pay CGT on the Capital Gain. But you have a CGT allowance of about £8000 per annum. This means you can 'sell' (i.e. take out as a capital distribution) a business asset (i.e. your company) for £32000 and still pay no tax on the capital gain!

Totally legitimate, providing you apply for the Statutory Concession before taking the capital distribution. (Your accountant should be able to do this for you).

[howdydoody]

Thanks for clarifying this

With a year's CGT allowance the tax saving is higher than I thought.

As it is CGT instead of income tax, then that would mean the tax rate applied to the remaining taxable element is 40%, and not the prevailing marginal income tax rate.