Budget, Entrepreneurs’ Relief and MVLs

What is a MVL?
A Members Voluntary Liquidation is a solvent liquidation, this means that a Company is not “bust”, but it is one that can pay all its creditors (with directors swearing a declaration that the company can pay all debts within 12 months). It is a tax efficient way to distribute assets to shareholders on cessation, for example upon retirement.

A members Voluntary Liquidation enables shareholders to receive distributions as capital rather than dividend income without limit, thus enabling them to take advantage of Entrepreneurs’ relief.

Which brings onto the question of what is Entrepreneurs Relief?
Entrepreneurs Relief (“ER”) is a valuable tax relief that reduces capital gains tax payable to 10% (instead of 20%) on the disposal of qualifying assets i.e. shares providing certain qualifying conditions are met
For more information on the terms of qualifying for Entrepreneurs Relief, please see HM Revenue and Customs Entrepreneurs’ Relief (Self Assessment helpsheet)

Entrepreneurs Relief and the Budget?
Entrepreneurs Relief reduces the tax on disposal of qualifying assets to 10%, it has been criticised as being excessively generous to people who are already rich, and as ineffective in incentivising entrepreneurs to start businesses.
It was much anticipated that the relief would be abolished completely as there has been speculation for a number of years, but the Chancellor decided against the abolishing it altogether and reduced the lifetime amount of eligible chargeable gains from £10 million to £1 million with effect from 11 March 2020. The £1m limit announced brings the relief back down to its original level when it was first introduced in 2008
This may impact on the net cash available to business owners who sell shares in their trading company or sell part of their business.

• The effect will be to increase the tax on a £10 million gain from £1 million to £1.9 million.
• Whereas for many with under £1 million of lifetime gains the change will have no impact.

The reduction in the lifetime limit came with the introduction of two anti-forestalling measures to counteract attempts to bank the £10m lifetime limit before the change.  i.e. Where a contract was signed before 11 March but the transaction had not been completed, a claim for the higher amount of ER will have to be justified by the taxpayer on the basis that the disposal was not made to obtain tax relief. Advice should be sort on individual  specific circumstances where contracts have been exchanged before 11 March, but have not yet completed.
This should not be confused with ‘Investors Relief’ which is for external investors in qualifying trading businesses, where there is no charge to the £10 million limit for this relief.

Considerations

• An MVL still allows for distributions to be that of “capital” rather than “income” attracting a lower tax rate of 20% under capital gain tax, rather than 40% for higher rate tax earners under income tax.
• Currently a £1m limit is still available under Entrepreneurs Relief, reducing tax down to 10%
•  It is widely expected that Entrepreneurs’ Relief will be abolished fully in the near future, but advice should be taken by anyone considering utilising the remaining lifetime limit or considering an MVL.