View the related Tax Guidance about Transactions in securities (TiS)
Transactions in securities and the Phoenix TAAR on a company sale or winding-up
Transactions in securities and the Phoenix TAAR on a company sale or winding-upThe transactions in securities (TiS) legislation is anti-avoidance legislation aimed at situations where close company shareholders have engineered a disposal of shares to obtain a beneficial capital gains tax (CGT) rate, ie avoid income tax, on specified transactions. The targeted anti-avoidance rule (TAAR) aims to combat cases of ‘phoenixism’ and applies to certain distributions made in the process of winding up companies. Phoenixism refers to a the same business ‘rising from the ashes’ of a company, in other words where a company is liquidated and subsequently its business is carried on under the same or broadly the same ownership via a new entity within two years of the winding-up. Such transactions are likely to also be covered by the TiS regime ― the TAAR was introduced to provide absolute certainty of treatment for such transactions. In practice when there is a company winding up the TAAR may be in point rather than the TiS. This guidance note discusses some of the TiS and TAAR issues that may be encountered on a sale / winding-up of a business. It is not intended to be comprehensive analysis of all the relevant statutory provisions. For details of the relevant legislative definitions and other provisions, see the Transactions in securities and the Phoenix TAAR ― outline of regime guidance note.See also Simon’s Taxes E1.14 and Simon’s Taxes D6.711A, E1.413, E1.416A.When will the TiS provisions apply?The TiS legislation targets schemes that aim
Demerger via liquidation ― tax analysis
Demerger via liquidation ― tax analysisThis guidance note follows on from the Demerger via a liquidation ― overview guidance note which gives an introduction to demergers via liquidations (also known as non-statutory demergers, or section 110 demergers) and includes diagrams to illustrate a typical demerger via liquidation. HMRC clearances will be required if this demerger route is chosen and appropriate time should be built into the transactions process for these. For more information, see the Demerger clearances guidance note.For overall guidance on demergers, including choice of the most appropriate route and planning the demerger project, see the Demergers ― overview guidance note.Tax analysis of a liquidation demerger ― overviewThere is more than one method for carrying out a liquidation demerger. However, the typical steps for carrying out a liquidation demerger are shown below. Depending on the steps involved, tax charges can be triggered either at the corporate or shareholder level (or both). For a more detailed description of the steps involved in a liquidation demerger, see the Demerger via a liquidation ― overview guidance note.A high-level overview of the steps and related tax implications are as follows:StepDescription of stepTax implications ― shareholder levelTax implications ― corporate levelOneInsert a new holding company (Liquidation HoldCo) above the current holding companyProvided HMRC accepts that the share exchange is driven by commercial reasons (confirmed by a TCGA 1992, s 138 tax clearance), the shareholders will not trigger any capital gain on the
Transactions in securities and the Phoenix TAAR ― outline of regime
Transactions in securities and the Phoenix TAAR ― outline of regimeThe transactions in securities (TiS) legislation is anti-avoidance legislation aimed at situations where close company shareholders have engineered a disposal of shares to obtain a beneficial capital gains tax (CGT) rate, ie avoid income tax, on specified transactions. Note there are also TiS rules for corporate tax purposes. These are to all intents and purposes redundant as companies are generally exempt from corporation tax on dividends and cannot, therefore, be said to be avoiding corporation tax on income if, instead, they receive capital sums. However, the corporate tax provisions have not been repealed in case some complex avoidance schemes would then become available to the corporate sector.The targeted anti-avoidance rule (TAAR) which aims to combat cases of ‘phoenixism’ applies to certain distributions made in the process of winding up companies on or after 6 April 2016. Prior to April 2016, such transactions were usually covered by the TiS regime. The TAAR was introduced to provide absolute certainty of treatment for such transactions. and in practice when there is a company winding up, the TAAR may be in point rather than the TiS.This guidance note runs through the key legislative rules and definitions. The concepts are further expanded in Simon’s Taxes E1.14. HMRC guidance on the TiS rules and on the TAAR can be found at CTM36800 and CTM36300 respectively. For a separate discussion of some of the TiS and TAAR issues that may be encountered on a sale /
Capital reduction demerger ― tax analysis
Capital reduction demerger ― tax analysisThis guidance note follows on from the Capital reduction demerger ― overview guidance note which gives an introduction to capital reduction demergers and includes diagrams to illustrate a typical demerger via that route.The tax consequences of a capital reduction demerger are similar to those applicable to a demerger via a liquidation (see the Demerger via liquidation - tax analysis guidance note). This is because the definition of scheme of reconstruction in TCGA 1992, Sch 5AA includes a reconstruction under CA 2006, Part 26. The availability of CGT reconstruction reliefs in TCGA 1992, ss 136 and 139 should give a tax-efficient result. However, there are potential tax liabilities under this route, particularly stamp duty and / or stamp duty land tax (SDLT).The main difference in the tax analysis relates to the position of the shareholders, which is discussed below.HMRC clearances will be required if this demerger route is chosen and appropriate time should be built into the transactions process for these. For more information, see the Demerger clearances guidance note.For guidance on demergers via a liquidation, see the Demerger via a liquidation ― overview guidance note.For overall guidance on demergers, including choice of the most appropriate route and planning the demerger project, see the Demergers ― overview guidance note.Tax analysis of a capital reduction demerger ― overviewThere is more than one method for carrying out a capital reduction demerger. However, the typical steps for carrying out a capital reduction demerger are shown below. Depending on
Close companies ― overview
Close companies ― overviewMeaning of close companyThe tax rules for close companies are intended to address those companies that are closely controlled (ie by the owners and their families) and therefore could be used to manipulate the tax position of its activities and its investors. Therefore, broadly speaking, most owner-managed or private family businesses will be close, but in many cases close company status may not be immediately apparent. For further details, see the Definition of a close company guidance note or alternatively the Close company definition video. Implications of close company statusThe main implications of close company status are as follows:•a penalty tax at a rate of 33.75% (32.5% before 2022/23) on the amount of any loans to the company’s ‘participators’ (broadly its shareholders)•a tax charge at a rate of 33.75% (32.5% before 2022/23 ) on the cash equivalent of benefits provided to ‘participators’, where these are not already taxed as earnings•where interest is due from a close company to a ‘participator’, there are special rules regarding the timing of corporation tax relief for the interest ― see the Connected party relationships ― late interest guidance note for an explanation of the rules•relief may be available for interest on loans taken out by individuals to purchase shares in a close company•where an overseas company would be close if it were in the UK, there are anti-avoidance rules which attribute gains by the company to its participators (see the Gains attributable to participators in
Informal winding up
Informal winding upA formal liquidation can be seen as an unnecessary expense when a company ceases business. This is especially true for small companies where the owners will not want to incur several thousand pounds of fees simply to realise the profits of their business.The Companies Act 2006 does offer an alternative to the formal liquidation process. This is an informal winding up, and is done by the company applying to Companies House to strike the company off the register. The strike-off procedure can be a low cost, simple way to dissolve a company, but it will only be suitable if the company is solvent, the company’s affairs are relatively simple to close down and if its assets are relatively easy to distribute. In more complicated circumstances, it may be more suitable to use a members’ voluntary liquidation (MVL), see the Closing a company down ― members’ voluntary liquidation (MVL) guidance note. In addition, the tax treatment of the amounts distributed on the dissolution of the company means that an informal winding up is usually only tax efficient for very small companies, ie with reserves of £25,000 or less.This guidance note discusses some of the issues a company and its shareholders face when implementing an informal winding up using the procedures under CA 2006, s 1003. For more details on the tax consequences on the winding up of a company, see the Tax implications of administration and liquidation guidance note.Requirements for an informal winding upWhen starting the process of
Tax implications of administration and liquidation
Tax implications of administration and liquidationThis guidance considers the tax implications of a company going into administration or liquidation.Introduction to company administration and liquidationCompany going into administrationA company which is in financial difficulty may go into administration. An administrator is appointed to manage a company’s affairs whilst it is in administration. It usually continues to trade during the period of administration.The function of the administrator is to fulfil several objectives:•the first of these is to rescue the company as a going concern•the second is to achieve a better result for the company’s creditors as a whole than would be likely if the company was wound up•the third objective is to realise property in order to make a distribution to one or more unsecured or preferential creditorsInsolvency Act 1986, Sch B1, para 3These are not a set of choices for desirable outcomes, but a hierarchy. The rescue of the company is the priority. The administrator will only actively pursue a better result for the company’s creditors on winding up if this cannot be achieved.An administrator can be appointed either out of court or with a court order. Out of court, an administrator can be appointed by the company, the directors or the holder of a qualifying floating charge.Company going into liquidationLiquidation brings the existence of the company to an end. On completion of the winding up, the company is dissolved. Liquidation can be voluntary or compulsory (defined below).A liquidator is appointed to sell all the assets, pay
Succession planning ― employee ownership trusts (EOTs)
Succession planning ― employee ownership trusts (EOTs)Where a controlling interest in a trading company is sold to an employee ownership trust (EOT) and the necessary qualifying conditions are met, there are capital gains tax reliefs for the seller and also the ability to pay bonuses free of income of up to £3,600 per year to employees. Therefore, using EOTs for succession planning can allow the owner of a business to pass on the company to the employees of the company for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs or private equity backed buy-outs and may be more attractive given the reduction in the maximum amount of business asset disposal relief available from March 2020. This guidance note sets out the method of transferring to an EOT, the tax relief available and looks at some practical issues arising.Detailed commentary on EOTs can be found in the Employee trusts ― implications of disguised remuneration and where are we now? guidance note and in Simon’s Taxes C3.1915.HMRC guidance is set out at CG67800C onwards and the legislation is within TCGA 1992, ss 236H–236U.In July 2023 HMRC launched a consultation to review employee ownership trust (EOT) rules, Taxation of Employee Ownership Trusts and Employee Benefit Trusts. This was part of a wider review of employee benefit trust (EBT) rules generally, with a consultation response closing date set for 25 September 2023. Possible changes under discussion include who should be
Transactions in securities clearances
Transactions in securities clearancesIntroduction to TIS clearancesThe transactions in securities (TiS) legislation gives HMRC the power to issue a notice of counteraction in respect of a tax advantage arising from specified scenarios. Broadly it applies where a transaction is carried out otherwise than for bona fide commercial reasons of which the main object is to obtain a tax advantage. There is no obligation to seek clearance from HMRC in relation to TiS and potential applicants may decide not to do so. For more information on the TiS legislation, including a summary of situations where the rules should not apply, see the Transactions in securities and the Phoenix TAAR ― outline of regime guidance note.A statutory clearance procedure is available under ITA 2007, s 701 (income tax) and CTA 2010, s 748 (corporation tax) and provides confirmation that HMRC will not issue a counteraction for the transaction in question. A clearance application generally takes the form of a letter or email to HMRC setting out the steps and anticipated tax implications of the
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