A solvent liquidation, also known as a Members Voluntary Liquidation (MVL), is a formal Insolvency procedure whereby shareholders of a solvent company voluntarily appoint a liquidator to wind up the company. The procedure is considered to be the most cost and tax effective way to extract shareholder value.
For the directors to declare the company ‘solvent’, it must be able to pay all liabilities and any statutory interest in full within 12 months. Once this part of the process has been completed, and all creditor liabilities discharged, any residual funds can be distributed either as capital or a distribution in specie to its shareholders.
The MVL procedure often entitles the business owner(s) to be eligible for Entrepreneurs’ Relief (ER), a tax relief that can reduce Capital Gains Tax (CGT) for individuals on the disposal of a business to just 10%.
Changes to Entrepreneurs’ Relief affecting solvent liquidations
Changes announced in the Chancellor’s Autumn budget this time last year, and further updates published in January 2019 sought to restrict the availability of ER in such cases, meaning business owners must now meet qualifying conditions during the two years prior to the disposal or sale of the business.
Some official bodies have even suggested ER should be abolished entirely, suggesting it is ‘expensive, regressive and ineffective’ and comes at a huge cost to UK taxpayers, raising concerns that the Chancellor will scrap it entirely in the near future. In the 2017/18 tax year, HMRC statistics showed that 43,000 taxpayers claimed ER at an estimated cost to the taxpayer of £2.3billion.
Critics also suggest that some business owners may use the MVL procedure as a tax efficient way of releasing funds upon the closure of a business, which can then be used to invest in a new business soon after.
What if ER is abolished entirely?
If (and it’s a big if) ER is scrapped entirely, it is unlikely that it will simply be withdrawn overnight. Often radical changes such as this aren’t implemented until the start of a new tax year, which will give business owners time to plan. However, this may differ if there is a change in Government and an emergency budget is announced.
If you are considering extracting value from your business using the MVL procedure, it is vital that you seek expert guidance from a licensed Insolvency Practitioner who can assess your current position, suitability and ER eligibility, which is where we can help. There are many implications of an MVL, and it’s vital that these are fully understood prior to proceeding, so as to maximise shareholder returns.