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Company Winding-up – Beware of Bona Vacantia

Company Winding-up – Beware of Bona Vacantia
There are essentially only two ways to realise the capital value of your limited company:

 

You can sell the shares
You can wind the company up and take its assets for yourself.
 

In the case of a sale of the shares, you will of course make a capital gain (or loss!) on the disposal, but in the case of a winding-up, the position is not so simple.

 

In many cases, the purchaser of a business does not want to buy the company that owns it – there can be sound commercial and tax reasons for this – and so they will instead buy the company’s trade and assets from the company, leaving it as a “cash-box”.

 

In order to get their hands on this cash, the shareholders of the company have two choices:

 

They can pay themselves dividends on which (if they are 40% taxpayers) they will suffer income tax at an effective rate of 25%
They can liquidate the company, in which case they will be deemed to have disposed of their shares and will make a capital gain. In the case of a trading company, the effective rate of CGT payable can be as low as 10% or even lower in some cases, thanks to Taper Relief for business assets.
 

The formal process of liquidating a company must be performed by a “Licensed Insolvency Practitioner” who will collect the debts due to the company, pay off its creditors (including HMRC) and then distribute whatever is left to the shareholders. Insolvency Practitioners charge a fee for this work, of course, and they are not cheap – a typical fee might be in the region of £3,000 to £4,000 and probably more if the company has assets other than cash, such as buildings.

 

Fortunately, there is a cheaper way to deal with winding up a company which can save a smaller company these costs – Extra Statutory Concession C16.

 

Instead of being formally liquidated, a company can be “dissolved” or “struck off” by the Registrar of Companies – either involuntarily, as a punishment for not filing its returns on time, or as in this case, voluntarily by asking for this to be done.

 

In strict law, if a company pays cash or assets out to its members before being “struck off” this is treated as a payment of a dividend for tax purposes – only distributions from a company which is in formal liquidation are treated as capital gains from the disposal of the shares – so income tax (at 25%, as explained above) would be payable.

 

ESC C16, however, allows a company and its shareholders to agree with HMRC that the distributions made just before the striking off can be treated as capital payments, provided the inspector of taxes is satisfied that there is no tax avoidance going on and the shareholders agree that they will pay any corporation tax that is due from the company.

 

The majority of family companies that are wound up are dissolved using ESC C16 because it saves the cost of a formal liquidation.

 

There is, however, a trap here for the unwary. Although a company can pay out its spare cash to its shareholders, a repayment of their share capital is technically illegal unless the company is in formal liquidation.

The share capital of many family companies is only a nominal sum – typically £100, or even only £1, but some have a larger amount of shares issued and this is where the problem comes in. In some cases, companies also have what are known as “undistributable reserves” – without going into the details of company law, these can arise, for example, where the company has re-valued its assets or has bought back some of its shares from a shareholder.

 

When a company is struck off without a formal liquidation, any assets it owns become what is known in law as “bona vacantia” – loosely “goods without an owner”, and as such these assets become the property of the Crown.

 

Until recently, this was only a theoretical problem in most cases. You were careful to make sure that all the cash and other assets were paid out from the company before it was struck off and that was the end of the matter.

 

In August 2006, however, the Treasury Solicitor issued a Notice reminding us all that the repayment of share capital outside a liquidation was illegal, and that therefore if a company was struck off the value of its share capital and its undistributable reserves became the property of the Crown, and he intended to pursue the shareholders for this value.

 

Fortunately, it has been agreed with the Treasury that this will only be done if the value of the share capital (and undistributable reserves) is £4,000 or more, so the typical family company with only 100 £1 shares issued need not worry, but if your company has £4,000 or more in share capital (or those pesky undistributable reserves), then if you do not have a formal liquidation you may find the Treasury Solicitor chasing you for the cash you were illegally paid by the company.

 

It is important to realise that this does not mean that a company cannot pay out more than £3,999 to its shareholders when it is being wound up – the problem only arises if its share capital has a nominal value of £4,000 or more, or if it has undistributable reserves.

 

The August 2006 announcement did not exactly make the front pages, so if you are planning to have your company struck off using ESC C16 make sure your accountant or tax adviser is aware of this change of policy by the Treasury!