Changes to the rules on claims for entrepreneur’s relief in the event of a company sale led to a spike in solvent companies being wound up in March before the new capital gains tax (CGT) rates came into force, according to the latest figures from insolvency body, R3
Figures from insolvency body, R3, found there were 2,663 solvent liquidations in March, more than double the previous record of 992 in April 2015. The monthly average for the 12 months prior to March 2016 was 768.
Tax changes introduced on 6 April mean directors winding up a solvent company can no longer claim entrepreneurs’ relief from the CGT due on any gains if they continue to work in the same trade as that company over the next two years. Entrepreneurs’ relief on CGT sees the tax charged at 10% rather than the standard rate.
Numbers of solvent liquidations have been abnormally high since the end of last year when the rules were announced, R3’s analysis suggests.
R3 said the change, which was introduced to prevent individuals avoiding income tax by ‘storing up’ profits in one company, winding it up and paying a reduced rate of CGT before starting again with a new company, has had a bigger impact than expected.
Andrew Tate, R3 president said: ‘The scale of the spike in solvent liquidations is a surprise. We expected there to be an increase as the clock counted down, but not one as big as this.
‘There will have been a mixture of different types of companies being liquidated, including those companies owned by those targeted by the rule. However, some genuine entrepreneurs may have had to accelerate their retirement plans to avoid being hit by the tax change.’
R3 has previously warned that the rule change may have unintended consequences for entrepreneurs approaching retirement who needed to wind-up their company.
Tate said: ‘Very often, retiring entrepreneurs who are winding up their company but selling or passing on their business will have to stay involved for a while to make the handover easier. Their presence as a consultant might be reassuring for customers, for example.
‘Obviously, this means they have to stay involved in the same line of work within the two year timeframe.’
Since the start of monthly records in March 2014, only five months have seen more than 900 solvent liquidations, and the period December 2015-March 2016 accounted for four of these.
Solvent liquidations accounted for two thirds of liquidations in March, compared to an average 35% over the previous two years.
