Entrepreneurs relief is an attractive tax break for owners of businesses who have sold or wish to retire and have a pot of money held in a company that they wish to extract in as tax efficient way as possible. QuickCap facilitates a distribution of company funds to shareholders, as a return on capital, which in most cases qualifies for Entrepreneurs relief.
Extra-Statutory Concession 16 (ESC C16) has been scrapped and new provisions incorporated into legislation removing the discretionary nature of what qualifies as a capital distribution. It is no longer a requirement to obtain advanced clearance from HM Revenue & Customs for distributions below £25k as they are automatically treated as capital distributions. For distributions above this amount, to obtain the tax break, a QuickCap MVL could be the answer.
It is always essential that the shareholders seek tax advice from their accountants or tax advisers, as this will be the key to deciding the most tax efficient route to take when deciding how to distribute surplus company funds to shareholders.
Examples of when a QuickCap can be used:-
When a company has fulfilled its purpose following the sale of all or part of a business; the directors of an owner managed company are looking to retire; where a contractor who has been operating under a limited company decides to work for another entity as an employee.
To take advantage of the tax relief available and minimise the costs of the QuickCap process the company has to be solvent once the assets have been realised all creditors paid in full, other than the liability to HM Revenue & Customs in respect of the company’s current corporation tax period – this can only be finally calculated once all other matters are resolved.
What are the benefits of a QuickCap?
- Capital distributions are usually more tax efficient than income distributions.
- The shareholders may benefit from Entrepreneurs relief at a tax rate of 10%.
- Funds can be distributed to shareholders immediately.
- Directors’ loan accounts or cash equivalent assets can be distributed in specie.
- There is a low cost fixed fee of £2.5k plus disbursements.
What are the costs of a QuickCap?
The cost of a basic liquidation can amount to between £5k and £10k. Historically, this has meant that shareholders of companies with surplus funds of just over the £25k limit, seeking to wind up their companies and obtain the surplus funds held in a tax efficient manner, faced a potential cost of 20-40% of the distributable funds, in order to qualify for the lower tax rates.
At Portland we recognised that in these situations, the liquidation costs are effectively being paid by the shareholders personally and therefore needed to be kept to a minimum in order to make the liquidation a worthwhile option. With this in mind, we developed ‘QuickCap’. This is a low cost, streamline, liquidation process which puts more control in the hands of the directors and engages more with the company’s existing professional advisors, thereby avoiding duplicating costs and enables shareholders to obtain their capital quickly in a cost efficient manner, which also allows them to benefit from the capital distribution tax rates. Our standard QuickCap fee is £2.5k plus disbursements, which includes statutory advertising and a statutory fidelity bond.
An example of the QuickCap process
To illustrate how the process works in practice we have set out a timeline of a recent ‘QuickCap’ case that we handled:-
As can be seen, we were able to act quickly and by working closely with the company’s accountants we were successful in distributing the majority of the funds to the shareholder the day after our appointment as liquidators. Steps to conclude the liquidation and make the final distribution of funds were completed within ten weeks of our first point of contact with the shareholder.
An additional benefit of this process is that in some circumstances if the liquidation commences immediately prior to the end of the tax year, the shareholders can benefit from two distributions in quick succession. The first distribution, made before the end of the tax year, can be calculated to use up any remaining capital allowances, with the second distribution being made several days into the new tax year. Once all other aspects of the liquidation are concluded a third and final distribution of the residual funds can be paid.
We believe the QuickCap process is an attractive proposition for maximising capital returns by legitimately using entrepreneurs’ relief to reduce the tax cost of the distribution. If you require further information please do not hesitate to get in touch.
Further information can be found on our website www.quickcap.co.uk