Since 1985, company owners looking to wind down a solvent business at the end of their working lives have been able to pay capital gains tax, rather than income tax on any surplus funds – by simply writing to Companies House asking officials to strike the business off its register.
Amid current concerns about tax avoidance, the UK Government has been making various endeavours to replace informal tax concessions. Therefore from 1 March this year, companies with reserves of more than £25,000 will have to enter formal liquidation proceedings in order to have their surplus funds taxed at the lower capital gains rate (which is currently 18%). This could cost each owner an additional £3,000.
The Financial Times has recently reported that accountants and policy advisors at business lobbying groups agree this new tax law will create an unnecessary burden on retiring entrepreneurs. While criticising it as being “a tax on success” and “a hidden cost of retirement”, commentators also argue that it undermines the Government’s efforts to encourage the rise in entrepreneurship in the UK.