A tricky area in the tax syllabus is liquidations. The easiest way to think of this is that up to the date of liquidation the company as a legal entity still exists.

This means that a distribution to shareholders before liquidation is treated an income distribution so exempt for corporate shareholders but subject to income tax for individual shareholders.

In addition, if the company is set to make a gain on a sale of an asset, the gain can be covered by any capital or trading losses the company has.

The company will be treated as ceasing to trade on the date of liquidation and terminal loss relief can be claimed with the loss for the final 12 months being carried back 36 months LIFO against total income to generate a tax refund.

A distribution to the shareholders after appointment of the liquidator is treated as a capital receipt on disposal of shares. For corporate shareholders this will be a chargeable gain while individual shareholders may be able to claim BAD relief and offset the annual exemption.

If the company sells an asset after the liquidator appointment, then the gain cannot be covered by capital or trading losses and will attract a corporation tax liability of 19%.

If no liquidator is appointed, payments up to £25,000 can be treated as capital. If the payment is more than £25,000 it is a distribution.

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