If you are a shareholder in a limited company which has outgrown its usefulness but still has some assets – perhaps cash – in it, you have three choices on how to extract that cash:
• You can pay it out as a dividend, and pay income tax on it – at an effective rate of 25% if you are a 40% taxpayer;
• You can appoint a licensed insolvency practitioner to liquidate the company, which will cost you around £4,000 in professional fees, but if the company was a trading company before it shut down, you may well be entitled to entrepreneur’s relief and pay CGT on the cash extracted at 10%;
• You can save yourself the professional fees by having the company dissolved and treated for tax purposes (under Extra Statutory Concession C 16) as a formal winding up, and this too will be treated as a capital gain and taxed at 10% provided entrepreneur’s relief applies.
At the time of writing, there is a proposal to replace ESC C16 with legislation which restricts the amount of cash you can extract to £4,000, but until this becomes law, there is no limit to the amount of cash that can be extracted using ESC C16. In order to take advantage of ESC C16, the shareholders have to write to the inspector of taxes confirming that they will settle any tax liabilities for the company, and that they intend to have the company struck off.
There is, however, another obstacle to using ESC C16. Strictly speaking, it is illegal for a company to repay its shareholders the money they subscribed for their shares without a formal liquidation. If, for example, the company’s share capital consists of 1,000 ordinary £1 shares, for which £1,000 was subscribed when it was set up, then when the company is dissolved, £1,000 of its cash cannot be paid out to the shareholders and as the company ceases to exist, that £1,000 becomes property which has no legal owner. Such property is known as ’bona vacantia‘ (Latin for ’goods with no owner‘), and becomes the property of the Crown – or, in the Duchy of Cornwall, the property of Prince Charles.
This means the Treasury Solicitor can demand that £1,000 from the ex-shareholders of the company, because they have no right to it in law.
Until very recently, there was a note on the Treasury Solicitor’s website (www.bonavacantia.gov.uk) which said that they would not pursue dissolved companies with a share capital of less than £4,000 – it is no coincidence that this is also the typical cost of a formal liquidation, as the note explains that this is how they arrived at the figure they would tolerate.
This note has now been removed, and a few days later the Treasury Solicitor gave an assurance that they will not attempt to use the ’bona vacantia‘ law to recover any amount of share capital.
So here is the advice – which by the way is only good until the change in the law referred to above comes into effect.
Practical Tip
There is a process called ’reduction of capital‘ which is permitted by the 2006 Companies Act. Using a rather cumbersome and formal process, you can reduce the company’s share capital to, say, £100, and then dissolve the company. Although the Treasury Solicitor has said they will not enforce their right to any share capital as ’bona vacantia‘, this represents the second change of policy on their part within one month, and I for one would not want to rely on their assurances.
James Bailey
