Changes to Members Voluntary Liquidation & entrepreneur’s relief
What is a Members Voluntary Liquidation?
A Members Voluntary Liquidation (MVL) is the winding up of a solvent company. A Members’ Voluntary Liquidation is a shareholder-led process and tax efficient way to close down a solvent company.
It’s usually used by shareholders wishing to close their company and withdraw their capital. All creditors of the company are paid in full and any remaining funds are distributed to shareholders.
Reasons why the shareholders may wish to close down a solvent company include:
• The company has ceased trading and the shareholders want to “unlock” the value of the business.
• The retirement of directors/shareholders.
• When directors/shareholders are in dispute and want to go their separate ways.
• Groups of companies may also include dormant subsidiaries.
• As part of a company restructure (under S.110 of the Insolvency Act)
What is Entrepreneur’s relief?
Entrepreneur’s relief allows shareholders to pay a lower rate of capital gains tax on any distributions received through a members’ voluntary liquidation.
If a business owner winds up a solvent business using a member’s voluntary liquidation (MVL), shareholders may be entitled to pay, for example, 10% Capital Gains Tax via entrepreneur’s relief on the distribution that they receive. This is much more favourable than the standard rate of capital gains tax. However, specialist tax advice should be sought from your accountant or tax advisor and all options explored when considering closing your solvent business.
2018 Budget Changes to Entrepreneur’s relief conditions
There are a number of conditions that have to be met in order to qualify for entrepreneur’s relief
• 5% of the issued ordinary share capital of the company (measured at its nominal value); and
• 5% of its voting rights.
• These requirements, as well as certain other conditions, must be met during the relevant ‘holding period’.
However, where there are shares acquired from an Enterprise Management Incentive (EMI) the ‘5% requirements’ do not apply. Also, the ‘holding period’ for EMI shares – during which certain other conditions must be met – begins on the date on which the relevant options are granted, rather than on the date on which they are completed.
The Autumn Budget has made some changes to these conditions. From 29 October 2018, in addition to the ‘5% requirements’ set out above, shareholdings acquired outside an EMI plan must also cover an entitlement to at least:
• 5% of the profits available for distribution to equity holders; and
• 5% of the assets available to equity holders on a winding-up.
As these changes do not apply to shares acquired on the exercise of EMI options, it remains possible for such shares to attract ER regardless of their voting or economic rights.
Additionally, from 6 April 2019, the ‘holding period’ during which the relevant Entrepreneur’s Relief conditions must be met will increase from one to two years.
Thinking of calling it a day?
If you or your client is considering closing a company or has questions about the solvent liquidation process please contact Bretts Business Recovery. We can can provide guidance on the process and if engaged with ensure the process is carried out smoothly.
Our insolvency practitioners are licensed by the Institute of Chartered Accountants and adhere to the highest standards.
The MVL team at Brett’s is director lead and we usually are able to make an early distribution within 24 hours of being appointed (with the appropriate indemnities) and will keep the shareholders appraised of progress with regular updates.
If you are looking for a tax efficient method for voluntary winding up, please get in touch.