Tax treatment of liquidating distribution

The new rules will apply where three conditions, called conditions A, B and C, are met.

Condition A – is widely drafted and applies to all “close companies” or companies that were close at any time in the two years prior to the start of the winding up.

tax treatment of liquidating distribution-13tax treatment of liquidating distribution-43tax treatment of liquidating distribution-43

This applies whether this involvement is as a sole trader, in partnership or in a new company.

Condition C – requires that it is reasonable in all the circumstances to assume that one of the main purposes of the liquidation, or arrangements of which the liquidation formed part, is the avoidance of an income tax liability.

To view this Portfolio, take a free trial to Bloomberg Tax Bloomberg Tax This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios, practice tools, primary sources and timely news. 811-2nd, Partnerships—Current and Liquidating Distributions; Death or Retirement of a Partner, provides a detailed discussion of the tax consequences of distributions by partnerships to partners, including those arising from distributions of a partner's share of the results of partnership operations, and other distributions by the partnership that do not result in termination of the distributee's interest in the partnership even though accompanied by a change in the distributee's and remaining partners' shares of capital or profits and losses, whether in money or property—all called current distributions—and distributions of money or property on the withdrawal of a partner whether on death or withdrawal—called liquidating distributions.

Liquidating distributions may be accompanied by other retirement payments that do not represent consideration for the withdrawing partner's interest in partnership property, and may be deferred compensation, or other claims against past or future partnership income. Mixing Bowl Transactions-§ § 704(c)(1)(B) and 737 1.

For this reason, the tax consequences of a liquidating distribution should always be carefully considered, especially if the "payout" consists of real estate.

811-2nd, Partnerships—Current and Liquidating Distributions; Death or Retirement of a Partner, provides a detailed discussion of the tax consequences of distributions by partnerships to partners, including those arising from distributions of a partner's share of the results of partnership operations, and other distributions by the partnership that do not result in termination of the distributee's interest in the partnership even though accompanied by a change in the distributee's and remaining partners' shares of capital or profits and losses, whether in money or property—all called current distributions—and distributions of money or property on the withdrawal of a partner whether on death or withdrawal—called liquidating distributions.

One area where this could have quite an impact is on property ventures many being conducted as joint ventures between different parties, there is a real risk that participants will have different track records such that some will be able to enjoy capital treatment whilst others will be subject to revenue treatment.

Again the “main purpose” of the liquidation will be critical in determining the tax treatment.

Currently, these distributions are treated as capital distributions and taxed as capital gains.

Where the conditions for entrepreneurs’ relief are met, such gains would be taxed at a 10% rate of capital gains tax.

In The Chancellor’s Autumn Statement he included a very brief reference to proposed changes to entrepreneurs’ relief to target “contrived schemes” whilst ensuring that the relief remained available for genuine commercial transactions.

Tags: , ,