Last updated: 24 Feb 2025 09:00 Posted in: AIA
In April 2025, the changes to business asset disposal relief announced in Labour’s first Budget will reshape the financial benefits associated with members’ voluntary liquidation (MVL).
These changes will have a direct impact on the tax reliefs available to your clients seeking to liquidate their solvent companies using an MVL. As an accountant, this is your opportunity to provide proactive guidance and ensure that your clients make informed decisions to maximise their tax savings.
A refresher on members’ voluntary liquidation
It’s worth revisiting the fundamentals of MVLs, even if you’re already familiar with the basics. An MVL offers solvent companies a structured way to close down operations and distribute profits to shareholders. It’s a route often chosen when the business has served its purpose, or when directors want to release retained profits in a tax-efficient manner. Compared to alternatives like mergers or simply winding down operations, an MVL is particularly beneficial for companies due to the related tax benefits.
What sets an MVL apart from other types of liquidation is its availability exclusively to directors confident in their company’s financial health. This assurance is given in a statutory declaration of solvency, stating that all debts can be fully settled before assets are distributed as capital, unlocking significant tax benefits for shareholders.
The process begins with engaging a licensed insolvency practitioner. Their role is critical – ensuring legal compliance, managing communications with stakeholders and providing a seamless experience. Working with an insolvency practitioner is not only a legal requirement; it also simplifies the procedure by giving clients a trusted guide throughout the process, particularly when navigating compliance requirements.
The advantages of an MVL today
For your clients, the financial benefits of an MVL are compelling:
Capital gains tax: Most distributions through an MVL can be treated as capital rather than income. This allows shareholders to pay capital gains tax instead of income tax. With capital gains tax rates currently significantly lower than income tax rates, this distinction represents a substantial financial advantage.
Business asset disposal relief: Most clients also qualify for business asset disposal relief (formerly known as entrepreneurs’ relief), which reduces capital gains tax on qualifying assets to just 10%. Compared to standard tax rates on dividend income, this offers substantial savings.
The upcoming tax changes and their impact
Starting in April 2025, changes to tax reliefs associated with MVLs will reduce the financial benefits of solvent liquidations.
These changes will have different implications based on business size and industry. For smaller businesses with limited retained profits, the increased tax rates could significantly impact shareholder distributions, making alternative options more appealing.
For larger companies, especially those with substantial retained earnings, the changes may still offer a degree of advantage over income tax liabilities, though the urgency to act before the deadline becomes even more critical.
The key adjustment is an increase in the rate for business asset disposal relief:
These changes represent a major shift in the financial incentives for clients considering an MVL. Directors with plans to liquidate their companies should act now to secure the current 10% rate and maximise their tax efficiency.
Is an MVL the right choice for your clients?
An MVL is often the most financially advantageous option for clients whose companies hold retained profits or assets exceeding £25,000. However, to ensure eligibility, clients must meet certain conditions. They need to confidently answer ‘yes’ to the following questions:
Failing to meet these requirements could expose directors to legal and financial repercussions. For instance, in the case of LRH Services Limited (in liquidation) v Trew and others [2018] EWHC 600 (Ch), directors faced personal liability for an invalid solvency statement. This resulted in significant financial penalties and reputational damage.
The case highlights the importance of thorough due diligence and accurate declarations before proceeding with an MVL. These outcomes can be avoided with careful preparation and expert guidance to avoid serious consequences.
By providing professional advice yourself and working alongside a licensed insolvency practitioner, you can help your clients to navigate these requirements and avoid potential risks. Proactive planning ensures that your clients meet all legal obligations while unlocking significant tax advantages.
Common pitfalls in the MVL process and how to avoid them
Navigating the MVL process comes with its challenges. These are the most common pitfalls we see – and some ideas on how they can be avoided them. By addressing these challenges proactively, you can make the MVL process far smoother and help clients to achieve the best outcomes.
Expanding your role as a trusted advisor
Maintaining clear and consistent communication with all stakeholders throughout the process is also a vital part of the smooth running of the MVL. The role of accountant has been steadily increasing to extend beyond compliance and reporting. It is becoming the norm to work with clients to proactively address upcoming changes, putting you in the position of a trusted advisor who adds significant value to your client’s business. This role is invaluable during the MVL process.
If they’re not able to confidently make a declaration of solvency, a creditors’ voluntary liquidation could also be considered as an alternative solution.
The role of insolvency practitioners in the MVL process
As a legally necessary element of the MVL process, insolvency practitioners naturally play a pivotal role in an MVL. But our in-depth knowledge extends beyond the legal and compliance technicalities.
In the MVL process, accountants and insolvency practitioners each bring unique strengths to the table, making collaboration essential for the best outcomes. You have an in-depth understanding of your clients’ financial histories, goals and long-term strategies, which provides a strong foundation for planning an MVL.
Meanwhile, consulting an insolvency practitioner means that potential risks can be identified early, which can nip disputes in the bud. We also manage the process, to relieve the pressure on you and your client.
This collaborative approach alleviates much of the stress and complexity that can be involved in a formal process like an MVL. For clients, the combined expertise of their accountant and insolvency practitioner ensures that their financial interests are protected, and the process is completed efficiently and effectively.
How to get started
Navigate the MVL process starts with creating a clear, practical approach. Here’s how you can make it easier for your client:
With the April 2025 deadline looming, the earlier you start, the smoother the process will be. Contact our team on 01908 754666 or enquiries@ftsrecovery.co.uk to discuss how we can work together to secure your clients financial advantages before the changes take effect.
Author bio
Marco Piacquadio is Director at FTS Recovery and FA Simms.
