The next step

Detailed commentary on calculating the taxable benefit in kind

[Memo]

Benefit in kind or a distribution?

Selling a company asset

It’s typically the case that when you close a company you first sell all its assets and pay all its debts. Whatever cash is left is distributed to the shareholders. Unless the company was loss making it will usually have to pay corporation tax (CT) at 19% on the proceeds from selling the assets. Plus, the shareholders are liable to capital gains tax (CGT) (after deducting any exemptions) at 10% or 20% on the cash distributed to them.

Example. Acom Ltd is being wound up. It sells a van for £6,000. When it bought the van it received tax relief for the cost. The £6,000 sale proceeds are liable to CT at 19% leaving £4,860 which Acom distributes to the shareholders. The maximum CGT tax bill on this is £972 (£4,860 x 20%) but it could be as low as zero depending on the shareholders’ personal tax positions.

Transferring a company asset

Instead of selling the van before winding up the company it could transfer ownership to the shareholders so that they could sell it privately. Assuming the shareholders are also directors, this counts as a taxable benefit in kind for them. The amount on which the director shareholder pays tax, and the company Class 1A NI, depends on whether the asset being transferred has previously been made available to any employee or director of the company for their private use.

For detailed commentary on calculating the taxable benefit in kind, visit http://www.tips-and-advice.co.uk , Download Zone, year 21, issue 01.

Example. We’ve assumed that the van was used in the business but not made available at any time for private use by an employee or director. The facts are otherwise the same as in our first example, except that Acom transfers the van to the director shareholders rather than selling it first. The bad news is that anti-avoidance rules mean that the company is treated as selling the van at its market value, i.e. £6,000. It must pay CT on this even though it receives nothing for it. As for the director shareholders, rather than paying CGT they’ll pay income tax on the full £6,000 and almost certainly at a higher rate than the CGT they would have paid if they received cash instead of the vehicle from Acom. What’s more, Acom must pay Class 1A NI of £828 (£6,000 x 13.8%) in respect of the benefit in kind.

While the director shareholders won’t have to pay tax on the proceeds from selling the van privately, overall it’s clearly a poor tax outcome.

Distribution in specie

There’s another alternative for extracting the value of the van from the company. It could transfer it as a distribution in the winding up. That is to say, not selling the van but transferring it to the shareholders instead of giving them cash as part of the winding up process. This is subtly different from the previous example where the van was transferred before the winding up. However, it doesn’t offer any advantage over the tax treatment in the first example, and HMRC might still argue that the stiff tax and NI charges in our second example apply anyway.

Tip. As a rule of thumb, it’s more tax efficient to sell a company’s assets and then distribute the proceeds as part of the winding up process.