When a client is approaching retirement and considering the future of their company, liquidation often emerges as an option where there is no successor or purchaser for the business or where an asset sale of the business arises. Liquidation allows retiring shareholders to step away while still receiving value from the company in a tax efficient manner. However, it is crucial to navigate the process carefully to ensure that the available Capital Gains Tax reliefs are maximised. Below are some key considerations for you to keep in mind when guiding clients through a liquidation process.
Tax considerations for the shareholder on a liquidation
The distribution of assets on liquidation of a company to a shareholder is considered a disposal/part disposal of the shareholder’s shares (which are chargeable assets) for CGT purposes as it is deemed a capital distribution. Ordinarily on the disposal of chargeable assets by an individual (whether business assets or not), CGT applies where the disposal proceeds are in excess of the base cost.
The principal reliefs that may be available in a liquidation scenario are retirement relief and revised entrepreneurial relief.
Retirement Relief
Normally for the relief to apply the company must be a trading company.However Section 598(7) TCA 1997 specifically provides for Retirement Relief to apply in the case of a liquidation.
In practice, the date of appointment of the liquidator may be treated as the date of the notional disposal, so that chargeable business assets on hand at that date will be included in the disposal. There is a Revenue concession (as stated in Revenue’s Tax and Duty Manual) which states if chargeable assets are disposed of within 6 months of the appointment of the liquidator, the sales proceeds from the disposal of these assets be taken when assessing the chargeable business assets in existence at the appointment of the liquidator (this applies to both chargeable business and chargeable non-business assets). It is important to note that this is only a concession and not in legislation. Therefore care should be taken when managing such circumstances.
Where the distribution upon liquidation of a company consists only of assets and does not include cash, such a distribution is specifically excluded from Retirement Relief.
It is also important to note that in a liquidation scenario Retirement Relief may apply to a holding company structure, provided the conditions are satisfied.
Revised Entrepreneur Relief
On a strict interpretation of the legislation Revised Entrepreneur Relief pursuant to Section 597AA TCA 1997 should not apply on a disposal of shares on a liquidation of a company, as the company would not be carrying on a qualifying business at the time of the disposal.
However, Revenue has confirmed in their manual that the relief can apply on the liquidation of a company provided the company was carrying on a qualifying business up to the time the liquidator was appointed and the liquidation is completed within two years.
In contrast to Retirement Relief, Revenue Guidance and practice appear to rule out any potential claim for Revised Entrepreneur Relief on a holding company structure in liquidation.
The above highlights the importance of completing a tax review of the specific circumstances of the client and their company in advance of entering into any liquidation. With proper planning, it can be possible to structure and time a liquidation in a tax-efficient manner for the retiring shareholders and to ensure the available reliefs are maximised for them
At OmniPro Tax & Legal, we not only provide expert advice on the tax implications and planning strategies for company liquidations, but we can also act as a liquidator for your client companies where you and your clients already have the tax side covered. Here at OmniPro Tax and Legal Limited, we understand the importance of actions taken while in liquidation from a tax perspective, so are ideally placed to act as liquidator, as we understand the importance of the steps involved so that the liquidation can be performed in a seamless manner.
With the right planning, it is possible to structure and time a liquidation to be as tax-efficient as possible. If you or your clients require assistance with a liquidation or maximising CGT reliefs on a liquidation, our team is here to help.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
