While liquidations do not feature regularly in the Advanced Tax exam, in 2021 we were surprised to see liquidations make repeated appearances in the exam.
We could very well see 5 marks on liquidations in the September 2022 exam.
There are two perspectives to consider -the company and the shareholder.
The key point to remember is the company’s period of account ends when the liquidator is appointed. This also forms the date of cessation of trade.
Usually, the company will be loss making and the loss in the final period must firstly be offset against the total income of the final 12 months preceding the date.
Thereafter, any remaining loss can be used under terminal loss relief and carried back against the total income of the previous 36 months on a LIFO basis to generate a corporation tax refund at 19%.
In many questions, the company may be planning on disposing its assets which will realise large gains. By selling the assets BEFORE the liquidator is appointed, the trading losses can be offset against the gain and will reduce the corresponding corporation tax liability.
If the assets are sold after the liquidator is appointed, the trading losses CANNOT BE OFFSET AGAINST THE GAIN.
From the shareholder’s perspective, the company can make a distribution before or after the liquidator is appointed.
There is no national insurance payable on dividends.
The shareholders (usually higher rate taxpayer) will have to pay income tax on the dividend at 32.5%. They will be entitled to the nil rate band of £2,000.
If the company makes a distribution AFTER the liquidator is appointed, this is treated a CAPITAL payment.
The shareholders will be taxed on a capital gain based on sale proceeds less cost less annual exemption of £12,300.
Higher rate taxpayers must pay CGT at 20%.
For directors who are employed by the company and own at least 5% OSC for the last 2 years, Business Asset Disposal Relief is available on the share gain.
BADR will reduce the rate of CGT from 20% to just 10% on the lifetime limit of £1M gains.
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