Income Tax (Trading and Other Income) Act 2005 section 396B

Distributions in a winding up

Section 396B sets out the targeted anti-avoidance rule (TAAR) under which a distribution made to an individual shareholder during the winding up of a UK resident company may be treated as an income distribution rather than a capital receipt, thereby subject to income tax rather than capital gains tax.

• The individual must have held at least a 5% interest (by ordinary share capital and voting rights) in the company immediately before the winding up, and the company must be or have recently been a close company.
• Within two years of receiving the distribution, the individual (or a connected person) must be involved in carrying on a trade or activity that is the same as, or similar to, that of the wound-up company — whether directly, through a partnership, through another company in which they hold at least 5%, or through a connected person.
• It must be reasonable to assume that the main purpose, or one of the main purposes, of the winding up (or arrangements of which it forms part) is the avoidance or reduction of an income tax charge, with the continuation of similar business activities being a key indicator.
• A distribution is excluded from this rule if it does not exceed the individual's capital gains tax base cost (so that no gain would arise), or if it consists of irredeemable shares (as in a liquidation demerger).

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