Search form here
With a budget being announced for October, right now may well be a good time to take a serious look at your options if you are considering an MVL.
An MVL is a process by which a solvent company is voluntarily wound up by its shareholders. Unlike insolvency, a member's Voluntary Liquidation means the company can pay its debts in full and is choosing to close down. There are a few reasons why this happens but the most common is when the directors of a family business want to retire and there is nobody to buy or take over the company. Another common reason is that the directors feel the business has achieved its objectives and is no longer needed.
The process of an MVL is designed to ensure a fair and orderly distribution of the company's assets. There is a set procedure to be followed and the MVL will go through several stages from when the directors meet to agree to the MVL process, until the final distribution of any assets. You will need to appoint an Insolvency Practitioner (IP) so, it is best to talk to us as soon as possible so we can look at your individual circumstances to help you understand the process and assess your options.
At the end of an MVL, the company will close and any capital will be shared amongst the shareholders. In many cases, directors looking to retire will be using this as a nest egg for the future. This means that you will want to make sure you end up with as much money as possible. MVLs are often a sensible, relatively tax-efficient, way of releasing capital for directors who have worked hard to build a successful business, and now want to enjoy the benefits of those efforts.
A full description of MVLs is available in the dedicated section on our website.
There is a red flag that seems to have been waving for quite some time, but it could have just started to wave quite vigorously. The reason for the concern is that when you release the capital using an MVL the return to shareholders is subject to capital gains tax.
In the recent change in government, there were several promises made about tax in the run-up to the election. However, as history has shown us, the real world of the Chancellor’s office can be different to the hustings. Current Chancellor, Rachel Reeves, has repeatedly pointed out that the Labour government would need to make "difficult decisions”.
In the flurry of policy discussions before the election, the current government didn’t seem to clearly say that CGT wouldn’t change. There was discussion of making hard choices though and these could involve tax reforms aimed at higher earners, including potential changes to CGT rules. Then, this morning Reeves announced billions of pounds of what she referred to as a ‘black hole’ in the governmental coffers. That money will need to come from somewhere, and capital gains tax is one potential target. If so, the October budget could bring some bad news for those looking to MVLs as a retirement pot or for funding their next venture.
Capital Gains Tax is a tax on the profit realised when an asset is sold or disposed of for more than its purchase price. In the context of an MVL then, CGT could apply to the amount shareholders take from the final distribution of the company's assets. Currently, the CGT rates in the UK are lower than income tax rates, making MVLs an attractive option for tax-efficient asset distribution.
Also, if you qualify then you may also have access to Business Asset Disposal relief, which could further reduce your tax charge. There has been speculation about the government considering increases in CGT rates to align them more closely with income tax rates. If such changes were implemented, the benefits of undertaking an MVL could be reduced, leading to higher tax liabilities for shareholders. If that happens Higher CGT rates would mean that shareholders receive less from the liquidation distributions, as a larger portion of their gains would be paid in tax.
In short, if capital gains tax changes, the final payout from your MVL could be less than you hoped. If you are using the MVL to bolster your retirement plans that could be a bitter pill to swallow and once raised, CGT is unlikely to be reduced.
Well, honestly, nobody has a crystal ball for this kind of thing. Personally, I have been expecting a change in CGT rates for some time even under the previous government so I will shocked if no action is taken this time. What I think we can certainly be confident in though is that CGT is not going to change in favour of the retiring directors if the coffers are currently looking empty, at some point they will need to fill them through tax revenue.
CGT is an obvious target for a rise at some point in the near future, and an MVL takes time to process fully. Add those two things together and you can see why we are suggesting considering your position sooner rather than later.
The practical upshot of all this is that, while we cannot 100% tell what the future will hold in regards to CGT, now is probably a good time to contact us and explore your options if you are considering a member's Voluntary Liquidation.