Members’ Voluntary Liquidation: Will They Still Be a Vehicle of Choice Post 6 April 2025?
As many of you will know, the Labour Government’s Autumn Budget announced that the rate of tax on headline Capital Gains Tax and Business Asset Disposal Relief will increase as of 6 April 2025.
This will have serious implications for business owners looking to close their solvent companies through a Members’ Voluntary Liquidation (MVL). So what will those implications look like and will MVLs still be an efficient and advantageous strategy for business owners planning their exit post 6 April?
Current position and what is changing
If you are a company director or shareholder with more than £25,000 in a company that has reached the end of its economic life, or that you are looking to close for any reason, an MVL offers an efficient method of extracting funds whilst terminating the company’s filing obligations. From a taxation perspective, the distributions received through an MVL are subject to Capital Gains Tax (CGT) rather than the typically higher rates of income tax. CGT has increased from 10% to 18% for lower-rate taxpayers and by 20% to 24% for higher-rate taxpayers with an individual’s annual exemption allowance of £3,000 remaining in place. This approach has been particularly attractive for cash-rich companies with significant retained earnings, as it offers directors a tax-efficient method to extract accumulated funds.
The CGT increase outlined in the Autumn Budget narrows the differential between CGT and Income Tax rates. Despite this reduction, the gap remains sufficiently substantial to provide entrepreneurs with tax incentives for business investment.
Many shareholders meet the criteria for Business Asset Disposal Relief (BADR). With this relief in place, individuals currently benefit from a preferential tax rate of just 10% on qualifying gains. However, this rate will increase to 14% on 6 April 2025, followed by a further rise to 18% from 6 April 2026. The lifetime limit of £1m will stay in place.
Strategic Considerations for Business Owners
We have seen the anticipated tax changes already encourage many business owners to expedite their exit plans. What does the landscape now look like for those considering an MVL in future?
While MVLs will continue to provide tax advantages compared to alternative exit strategies, business owners will need to assess whether it still offers the best outcome, bearing in mind the higher Capital Gains Tax liability.
What does the MVL process involve?
Navigating the MVL process begins with a clear and practical strategy which is overseen by a licensed insolvency practitioner.
The start of the process involves working closely with your advisers to assess your company’s financial health and determine whether an MVL aligns with your objectives. This includes reviewing liabilities, future business plans, and retained profits to ensure it’s the right approach.
A Declaration of Solvency must be prepared, which includes a Statement of Affairs. This confirms that the majority of company directors have made a full enquiry into the company’s financial affairs and have decided that the company can pay all its debts in full plus interest within a 12-month period. The Declaration of Solvency includes a simple form of balance sheet for the company, as of the date it is placed into liquidation.
Following the Declaration of Solvency being sworn, a meeting of the shareholders is held, where the company is placed into Liquidation and a Liquidator appointed.
If, during the administration of the liquidation, the Liquidator decides there are insufficient assets to settle the creditor’s claims in full, then the MVL can be converted to a Creditor’s Voluntary Liquidation (“CVL”) i.e. an insolvent liquidation.
Once the MVL is approved by 75% of shareholders by value, the liquidation process begins. The Liquidator advertises in the London Gazette, inviting creditor claims within 21 days, settles valid claims, disposes of company assets, completes all necessary documentation, and ultimately removes the company from the official register.
The Liquidator may distribute non-cash assets ‘in specie’ to shareholders after valuation to ensure fair allocation. Following asset distribution and obtaining HMRC clearance, the Liquidator concludes the MVL process, leading to the company’s dissolution.
The Future of MVLs
An MVL remains a tax-efficient way of closing down a solvent company, with other benefits including the potential for a fast closure with assets distributed quickly, the liquidator being given the power to deal with any difficult creditor claims and ensures the business will be closed appropriately by an independent insolvency practitioner.
For further information on whether an MVL is the appropriate scheme to use for your business please call a member of the Bretts team on 0808 168 7540 or email us at enquiries@brettsbr.co.uk