Withdrawing Investment from a Company
There are a number of strategies to do this:
- Simply sell shares in the company.
- The company could purchase the shares back from the shareholder
- The company could be put into liquidation.
Selling shares in a company may not always be straight forward as there is no ready market for shares in unquoted companies.
Sale of Shares Back to the Company
Where it is not possible to sell the shares to another individual, it may be possible for the company to buy the shares.
Depending on the circumstances of the transaction, the amount received will be treated as either:
- INCOME DISTRIBUTION (DIVIDENDS) or
- CAPITAL PAYMENT.
Conditions for treatment as a CAPITAL PAYMENT
- The company must be an UNQUOTED TRADING COMPANY. (AIM shares are treated as UNQUOTED)
- The shareholder must be RESIDENT in the UK.
- Owned by the shareholder for MORE THAN 5 YEARS (3 YEARS if INHERITED).
- The shareholding MUST BE SUBSTANTIALLY REDUCED (I.E. SELL MORE THAN 25% OF SHAREHOLDING).
- The shareholder must not immediately after purchase be connected with the company (i.e. be able to control or own more than 30% of the shares).
The benefit of the transaction being treated as a CAPITAL PAYMENT is that BADR may then apply.
It is not always the case that LIQUIDATION occurs due to bankruptcy. It can be an effective way of extracting the final value of the company where no buyer can be found for the sale of the shares OR the net assets of the company are worth more than the shares on a going concern basis.
If PAYMENTS are made to the SHAREHOLDERS:
- BEFORE the LIQUIDATOR is appointed, the receipts are taxed as INCOME (DIVIDENDS)
- AFTER the LIQUIDATOR is appointed, the receipts are taxed as CAPITAL RECEIPTS for the disposal of the shares.
The tax implications for the company are as follows:
If the company makes dividend distributions then the dividends are not tax deductible and there will be no tax to pay on the distributions.
If the company makes CAPITAL distributions, for example on the distribution of a building, this will give rise to a deemed disposal at market value. This will give rise to a chargeable gain or allowable loss equal to the market value less the cost of the building. Indexation allowance will be available until December 2017 and will be deducted from any chargeable gain arising.
When a liquidator is appointed, it leads to the END OF AN ACCOUNTING PERIOD and the COMMENCEMENT OF A NEW ACCOUNTING PERIOD. The company remains liable for corporation tax and a corporation tax computation is required for both ACCOUNTING PERIODS.