HMRC have published their long awaited guidance on the Phoenix TAAR.

The rules were introduced from 6 April 2016 to combat a common tax planning arrangement whereby a company traded for a period of time accumulating cash in a low corporation tax environment. The company would cease to trade and the shareholders would then liquidate the company and return the surplus cash to themselves with the potential of Capital Gains Tax (CGT) at 10%, this being a much lower rate of tax than that on a dividend which could be as high as 38.1%. The shareholders would go on to start a new limited company with new contracts and repeat the cycle. This type of planning was very popular with property developers who would run different developments through a new company each time.

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 (and taxed at the higher income tax rates) where certain conditions are met. For the rule to apply, all of the following conditions must be met:

  • Condition A: The individual receiving the distribution had at least a 5% interest in the company immediately before the winding up
  • Condition B: the company was a close company at any point in the two years ending with the start of the winding up
  • Condition C: the individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution
  • Condition D: it is reasonable to assume that the main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to Income Tax.

It is important to note that these rules fall within self-assessment and the individual has an obligation to report the transactions on their tax return as an income distribution if they are caught by these rules.

The HMRC guidance with examples can be found at

If you would like our assistance with this issue, please call Craig Simpson on 01332 365855 or email at

 As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.