Last updated: 18 Oct 2024 08:00 Posted in: AIA
While a Members’ Voluntary Liquidation (MVL) is the ultimate exit tool for solvent companies, the tax incentives that bolster the appeal of an MVL are expected to be downgraded following the Autumn Budget. Ahead of anticipated tax reforms, should accountants instruct their prospective MVL clients to act immediately to avoid missing out on substantial tax savings, or wait it out?
Company directors considering closing a solvent limited company through a Member’s Voluntary Liquidation (MVL) must act with haste. The Chancellor of the Exchequer, Rachel Reeves, is expected to deliver sweeping tax rises in Labour’s first Autumn Budget on 30 October 2024 which could redefine an MVL’s key tax advantages and significantly overhaul the current business tax framework.
Capital Gains Tax could be in the firing line, along with Business Asset Disposal Relief, both essential to the tax efficiency of an MVL. Chris Bristow, a solvent liquidation specialist at Real Business Rescue explores the future of MVLs.
Is an MVL the ultimate exit tool for solvent companies?
A Members’ Voluntary Liquidation is a formal company liquidation procedure for solvent limited companies or subsidiaries with substantial retained profits. Solvent clients with asset or cash-rich businesses, one chapter away from the end of their lifetime, should consider fast-tracking their plan to maximise tax savings.
While a Members’ Voluntary Liquidation is the ultimate exit tool for solvent companies, the tax incentives that bolster the appeal of an MVL are expected to be downgraded following the Autumn Budget. Ahead of anticipated tax reforms, accountants must instruct their prospective MVL clients to act immediately or risk missing out on substantial tax savings.
What happens during a Members’ Voluntary Liquidation?
Appoint licensed insolvency practitioner – Your client must appoint a licensed insolvency practitioner to liquidate their solvent company.
Declaration of solvency – To proceed with a Members’ Voluntary Liquidation, a declaration of solvency must be signed which attests to the solvency of the company. To judge whether a company is solvent, it must be able to settle company liabilities within 12 months.
In addition to the sworn declaration of solvency, the financial position of the company will be thoroughly assessed. This ensures that once company liabilities are settled, sufficient funds are available to extract.
General meeting of shareholders – A general meeting of shareholders must be held to ensure that a minimum of 75% of shareholders agree with the MVL. If the MVL is approved, the licensed insolvency practitioner will take control of liquidating the company.
Company liquidation – The appointed insolvency practitioner will begin the company liquidation process. They will notify HMRC and Companies House, as required, and the liquidation will be advertised in the Gazette. Any outstanding creditors will be invited to submit their claims, however, due to the solvent nature of an MVL, claims are typically limited, if any.
Capital distributions – Once outstanding affairs with creditors are settled, any remaining funds in the company will be distributed to shareholders, also known as capital distributions. Any indemnities will also be settled at this stage.
Company dissolved – Once the bulk of the MVL process is complete, the company will be dissolved. Company records will be removed from the Companies House register after 3 months.
Prior to an MVL, clients are advised to undertake preparations to minimise the length of the MVL process, and therefore, the associated costs. An MVL is a quick and seamless process that can efficiently release cash.
The benefits of a Members’ Voluntary Liquidation include:
Liquidation solution for solvent companies – A Members’ Voluntary Liquidation is for solvent companies; therefore, company assets must outweigh liabilities and company liabilities must be settled within 12 months of the liquidation date. If the company cannot meet this requirement, an alternative procedure may be suitable, such as a Creditors’ Voluntary Liquidation or Company Strike Off.
Controlled procedure – A Members’ Voluntary Liquidation is entered voluntarily, so your clients can retain control over the process, including the timeline. Your client will appoint a licensed insolvency practitioner of their choosing, or on the back of an accountant’s referral to liquidate their company.
Quick and efficient cash release – An MVL is designed to release cash efficiently, making it a fast liquidation procedure for directors seeking a quick exit.
Highly tax efficient process – The MVL route facilitates a tax-efficient exit as distributions are classed as capital, rather than income, and therefore, subject to Capital Gains Tax (CGT), rather than Income Tax. Your clients may also qualify for Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, further reducing their tax liability.
Fully managed process – The MVL process is managed by a licensed insolvency practitioner, therefore, making it a stress-free experience for you and your clients.
Business Asset Disposal Relief and Capital Gains Tax in the firing line
While Labour’s manifesto ruled out increasing Income Tax, National Insurance Contributions, VAT and Corporation Tax, the government must find a way to plug a £22 billion black hole in public finances they claim to have been left behind by the former government.
The Chancellor explained that ‘very tough decisions’ will need to be made.
“I’ve been really clear that the Budget on 30 October will require difficult decisions on tax, on spending, and on welfare," she said.
"But the prize - if we can bring stability back to our economy, if we can bring investment back to Britain - is economic growth, good jobs, paying decent wages in all parts of our country, to realise the huge potential that we have.”
Major tax reforms are expected as part of the Autumn Budget, such as:
Increase in Capital Gains Tax rates – We anticipate that the gap between Capital Gains Tax and Income Tax will be tightened. Capital Gains Tax rates, currently at 10% (basic rate) and 20% (higher rate) are expected to increase, along with reliefs, such as the Annual Exempt Amount (AEA), which could be further reduced from £3000.
End of Business Asset Disposal Relief – Business Asset Disposal Relief is a tax relief scheme that applies to asset disposals when closing a solvent business. BADR reduces Capital Gains Tax to 10%, for which the lifetime limit is £1 million. If BADR is scrapped, this eliminates a key tax advantage currently available under an MVL.
The Capital Gains Tax annual exemption, known as the annual exempt amount, has tapered in recent years, from £12,300 to £6000 in 2023/24, to £3,000 in 2024/25. The Business Asset Disposal Relief lifetime limit on qualifying gains was reduced from £10 million to £1 million on disposals made on or after 11 March 2020.
As the future of Business Asset Disposal Relief is under threat, the tax efficiency of an MVL hangs in the balance. If your client is considering closing a solvent company through the MVL route, an insolvency practitioner can advise accountants and their clients.
Why may clients require a Members’ Voluntary Liquidation?
Members’ Voluntary Liquidation services are essential for company directors, as the future of their business may change course at any point. An MVL may be pursued as the company no longer serves a purpose to the director due to various reasons, such as:
In light of the anticipated changes to CGT and BADR, clients may seek a Members’ Voluntary Liquidation to cash in on their investment and minimise their tax liability, which could increase following the tax reforms likely in store at the Autumn Budget.
Advice for accountants – what does this mean for clients?
A Members’ Voluntary Liquidation is a tax-efficient exit tool for clients considering closing a profitable business with capital in the region of £25,000. While accountants are the guiding hand for all financial health-related queries, a licensed insolvency practitioner navigates the insolvency field as it is a specialist domain.
As the future of Business Asset Disposal Relief is uncertain, solvent companies at the end of their useful life and on track for liquidation must take heed of potential future tax reforms. Accountants are urged to advise their clients to act now, or possibly risk a greater tax liability in months to come.
Cashing in on a solvent business
Potential reforms to Business Asset Disposal Relief could affect its future, so company directors considering liquidating a solvent company are urged to accelerate the decision-making process to avoid missing out on major tax incentives that could be eliminated following the Autumn Budget.
