what's a capital distrubution (in accounting) and how is it taxed?

Question

Edit: Yes I am a UK resident.
I am contracting through an umbrella company which I am leaving this week because I am out of contract for the moment.
They have offered to pay me some of my turnover through a capital distribution instead of wages/dividends as it attracts less tax.

From what I gathered from the web, Capital distributions are done when companies are wound up and I don't see how they are planning to do it with me. I will ask them tomorrow but I doubt they will give me a satisfactory answer.

Cheers.

Answer 1

I would assume that you have received a K-1 from a partnership or S-corp that has a line that says "capital distribution" (line 16D on an 1120S K-1 and line 19 on a 1065 K-1) and that is why you are asking. The capital distribution will not be taxed as long as it is under your basis in the entity - if it exceeds basis it is taxed as capital gains or ordinary income based on the holding period. This "exceeding basis" is a more complicated issue and most likely requires that you contact a tax PROFESSIONAL (not a tax preparer in a nationwide tax prepr chain). Your taxable amount on a K-1 is made up of the other lines "flowing through" to you. If this is not the scenario of your question post more details and we can answer better.

Edit: Sorry my answer was for a US entity.

Answer 2

If it set up correctly, a capital distribution will be subject to capital gains tax instead of income tax.

This will give you access to the annual exemption (currently £7,800 I think) and also taper relief. It is likely that the underlying shareholding will be treated as a business asset so the taper relief after two years is 75%.

Answer 3

What country are you in and more details please.
The Revenue and Customs website should be able to help you, if you are in the UK.

Answer 4

I'm an accountant and haven't got a clue!

Answer 5

ask the accountants