Income Tax (Trading and Other Income) Act 2005 section 404A

Distributions in a winding up

Section 404A provides an anti-avoidance rule that treats certain distributions received by an individual from a non-UK resident company being wound up as dividends subject to income tax, rather than as capital distributions subject to capital gains tax.

• Where an individual holds at least a 5% interest in a non-UK resident close company that is being wound up, any distribution received may be reclassified as a dividend if the individual continues a similar trade or activity within two years
• The reclassification applies only where it is reasonable to assume that tax avoidance is a main purpose of the winding up or of wider arrangements of which the winding up forms part
• Distributions are excluded from reclassification where the amount does not exceed the individual's capital gains tax base cost (so that no capital gain would arise), or where the distribution consists of irredeemable shares (as in a liquidation demerger)
• A 5% interest means holding at least 5% of the ordinary share capital with at least 5% of the voting rights, and jointly held shares are apportioned according to the value of the individual's share