October 29th, 2012 / Insight posted in

Dividend can still be paid as capital

RT writes: I understand there was an announcement last month on paying out capital dividends when you close down a limited company. We are closing our small family company, which has share capital of £1,000 and retained profits of £150,000. Do we need to change our plans?

As part of the draft finance bill published last month, HM Revenue & Customs proposed that Extra Statutory Concession (ESC) 16 is codified into tax law, rather than continuing to exist as a concession, writes Chris Lane, a partner at Kingston Smith LLP.

Under the draft finance bill, the proposal is to allow a fixed amount of £25,000 to be classified as a capital dividend. Any sum above this will be treated as an income dividend and, therefore, will be subject to income tax rather than capital gains tax.

Therefore, as long as you can complete the transaction before the finance bill is made law, you will be able to rely on the current ESC 16. This will allow you to treat the full amount of the accumulated reserves as capital and for shareholders to pay capital gains tax on the receipt, rather than receiving a normal dividend from the company and paying tax at the income-tax rate.

The reason ESC 16 is no longer considered necessary by the Treasury Solicitor is that it is now much easier to formally reduce the share capital of a company under the Companies Act 2006.

Once the proposed new rules come into play, each company will be limited to a £25,000 capital payment to shareholders unless it goes for a liquidation.