Maximising shareholder value: CGT planning and Members’ Voluntary Liquidation

If you've recently sold your business, are planning to retire, or have a solvent company which has reached the end of its commercial life, you may be considering how to extract the remaining value in the most tax-efficient way. For many shareholders, a solvent liquidation or Members' Voluntary Liquidation (MVL) can provide significant tax advantages compared with extracting funds as income.

In particular, given the speculation around future changes to Capital Gains Tax (CGT) and business taxation, business owners should consider their options sooner rather than later.

How an MVL can provide a tax-efficient extraction of value

If there is more than £25,000 in the company, an MVL should be considered as a tax efficient means of extracting value for shareholders.

• An MVL is a solvent liquidation where the company has sufficient assets to enable all its creditors to be repaid in full plus statutory interest within 12 months.
• Assets distributed by the Liquidator to shareholders are treated as a capital distribution. The current rate of CGT for a higher rate taxpayer is 24%.
• Most shareholders will have an annual tax free allowance, known as the Annual Exempt Amount (AEA), which is currently £3,000.
• Shareholders may also be able to benefit from Business Asset Disposal Relief (BADR), which can significantly reduce the rate of CGT payable on qualifying gains. Currently at 18% this is less than the higher rate of income tax that would be applied if funds were extracted as income via a salary or dividends.

Beware of HMRC's targeted anti-avoidance rules

In order to stop the MVL procedure being misused by shareholders as a means of extracting company profits but then essentially carrying on the same business, the distribution will be reclassified as dividends and subject to income tax, if all the following conditions are met:

• The business is a close company - controlled by a small group of people
• The shareholder owns at least 5% interest in the company
• Within two years of the distribution the shareholder continues to be involved in a similar trade or activity
• The arrangement has as one of its main purposes the obtaining of a tax advantage

Key considerations for directors prior to an MVL

Solvency

• The company must be solvent. The directors must swear a Declaration of Solvency (DoS), a formal statement by the directors confirming that, after carefully reviewing the company's financial position, they are satisfied that all creditors can be physically paid in full, together with any applicable interest and within 12 months of the date of the liquidation.
• It is a criminal offence to make a DoS without reasonable grounds.

Identifying all liabilities

• Directors should take care to identify not only known liabilities recorded in the company's accounts, but also contingent and future liabilities. These may include lease obligations, dilapidation claims, pension liabilities, warranties and indemnities given on the sale of a business, employee claims, disputed matters and outstanding tax liabilities. Failure to identify such liabilities could have serious consequences.

Valuation and realisation of assets

• Where the company's assets comprise more than cash at bank, shareholders should consider how these assets will be realised and the length of time it may take to realise these assets. If assets are to be realised and the proceeds distributed to shareholders by the Liquidator then professional valuations may be required for property, investments or other significant assets. Assets can also be distributed directly by the Liquidator to shareholders by way of a distribution in specie.

Timing could be key

• If an MVL is being considered, early planning is important. The timing of a liquidation can affect the tax outcome for shareholders as tax legislation and rates will change over time. Reviewing the options at an early stage and taking professional advice can help maximise shareholder value, provide greater certainty and avoid missed opportunities.

Our restructuring, tax and financial planning specialists can help you determine whether an MVL is the right option and support you through the process from start to finish. Please get in touch to speak to our Restructuring and Insolvency team. Call 0808 144 5575 or email help@armstrongwatson.co.uk.