The main purpose of TAAR is to beware and prevent business owners from converting dividend income into a capital payment, to avoid paying income tax instead of paying capital gain tax and to reduce their overall tax liability. The technique is basically a tax evasion technique, and HMRC discourages such practices.
This practice is generally known as โphoenixismโ (arising from the ashes).
A distribution in a winding-up made to an individual on or after 6 April 2016 will be treated as if it were a distribution where certain conditions are met:
- An individual holds up to 5% of ownership in the right before the winding up.
- The company was a closed company at any point in time for 2 years, ending with the inception of theย winding up.
- After winding up and receiving the distribution, the person carries on and continues the same trade, whether directly or indirectly or through a partnership, owning up to 5% of the shares in the company within 2 years of winding up.
- It is clear the winding up is taken just toย reduce the tax liability and avoidย paying high taxes.
The rules also apply to companies across borders in case aย company which is non-resident is wound up.
For further in-depth guidance from HMRC on this topic: HMRC’s internal Company Taxation Manual
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