The 2015 Budget announced significant changes to the income tax treatment of dividends.
As a result, from 6 April 2016, the differential between the highest rate of income tax applying to dividends (38.1%) and the main rate of Capital Gains Tax (“CGT”) (28%) is over 10% (with the differential being over 28% if Entrepreneurs’ Relief applies). You can read our detailed summary of the changes to the dividend tax rules here
Given the increasing difference between the personal tax rates, the government has reacted to individuals structuring transactions to receive a capital rather than an income return by proposing changes to the existing tax treatment of company distributions. The changes, if enacted, will take effect from 6 April 2016.
The government proposals seek to address four potential situations:
1. Where a shareholder sells shares in a company which has retained profits that could have been distributed as a dividend.
In this situation, a proportion of the proceeds received for the sale of shares would be taxed as income.
2. In the case of a winding-up where there are distributable profits ‘in excess of a company’s commercial needs’ or where a new ‘phoenix’ company is set up by the same owner to effectively undertake the same business, the distributions received would be recategorised and taxed as income rather than capital.
For ‘phoenix’ companies, a new ‘Targeted Anti-Avoidance Rule’ (“TAAR”) will be introduced. This will apply where an individual receives a distribution on the winding-up of a company, and within two years, the individual carries on a similar business.
3. Under the current rules, where there is a repayment of share capital (including share premium), the payment is not treated as a distribution and it is a return of the shareholders’ capital.
The existing anti-avoidance provisions will be widened so that in certain situations (most commonly where there has been a previous share reconstruction creating new share capital/premium), all or part of the repayment of share capital would be taxed as a dividend.
4. For a company purchase of its own shares, the current default tax treatment is that any excess paid over the amount of the share subscription is treated as a distribution, unless the specific conditions allowing capital treatment are satisfied.
The suggestion from the government is to tighten the specific conditions allowing for capital treatment, with the likely result being that more transactions will be taxed as dividends.
For any current transactions, it would be prudent to complete these before 6 April 2016 (or even the Budget on 16 March 2016) so that the individual has certainty over the treatment under the current rules and benefits from capital treatment, where the position could be quite different from 2016/17.
For more information, please contact your usual Blick Rothenberg contact or Nimesh Shah on +44 (0)20 7544 8746 or at firstname.lastname@example.org