The dividend tax has been the last straw for many small company owners. This extra tax burden on top of the hassle of RTI and auto-enrolment makes operating the business through a company not worth the candle.
If this is your feeling, we should talk about your options for trading without a company – as a sole-trader or partnership. To extract any remaining funds from your company you will need to pay a dividend or to liquidate the company so that the distribution is treated as a capital gain.
The dividend will be taxed at 0%, 25% or 32.5% in your hands if it is paid before 6 April 2016. The dividend tax will add 7.5% to those figures for amounts paid after 5 April 2016. Where the distribution is treated as a capital gain, you will pay capital gains tax (CGT) at 10% if entrepreneurs’ relief applies; otherwise CGT is due at 18% or 28%.
However, these low rates of CGT can’t be guaranteed to apply to distributions made after 5 April 2016, as the Government is planning to make people pay the dividend tax rates when a business is ‘phoenixed’. This means liquidating the company, then starting up the same or similar business within two years, in another company or as an unincorporated business. These phoenix rules could apply even where the new business is undertaken on a much reduced scale or with new partners who were not involved in your old business.
The dividend tax rates will apply to distributions made as part of liquidation if HMRC can show that one of the main aims of the liquidation was to save tax; this will not be difficult to prove.
To take advantage of the low CGT rates, you should consider liquidation before 6 April 2016 and aim to pay out most of the funds before that date. Liquidation is not a simple exercise however, so careful planning will be required.