Contractors' Questions: When to extract £20,000 winding up my 'Ltd'?

Contractor’s Question: My solvent limited company has not been trading for some time, and I’m retiring so will apply for it to be ‘struck off.’ The only asset is £20,000 in the bank account, which can be paid out as a capital distribution. 

The final accounts will go to HMRC. But does it matter whether the £20,000 is paid out beforehand -- prior to the final accounts getting drawn up (showing nil bank balance), or afterwards (showing that there is £20,000 bank balance in the accounts)?

Experts' Answer: Thanks to now in-force legislation that has its roots in a tax concession which was known as ESC C16, the short answer to your question is ‘make the distribution beforehand.’

The important paragraph for your scenario -- involving the sum of, crucially, £20,000 -- has been reproduced for you -- by me from HMRC guidance, below:

“Distributions made in anticipation of dissolution of the company will not count as ‘distributions’ i.e. dividends subject to dividend tax, if the total amount of the distributions does not exceed £25,000.”

Therefore, it would appear to make sense to make the distribution before submitting accounts and show a nil balance at the bank, as you suggest as option one of the two options you’re considering.

The key issue to remember here is that if a company’s distributions in the winding up process are £25,000 or less, “capital treatment” will apply, whereas distributions in excess of £25,000 will be treated as income in the shareholder’s hands, which will then become subject to the prevailing rates of tax depending upon the individual’s circumstances.

The experts were Colin Wilson of Opus Restructuring LLP and Graham Cook of Jarem Accountancy Services.