14 Jan 2019

MVL - Timely reminder for yearly tax planning

MHA Monahans Insolvency Article1 2019

Members’ Voluntary Liquidation (‘MVL’) – A timely reminder for year end tax planning

I have previously run a series of articles highlighting the benefits of solvent winding-up and will take a closer look here at the key, if somewhat limited, tax planning opportunities that must be considered, particularly as we approach the end of the fiscal year.

It is worth starting with a very quick recap of why MVL can be such a cost effective and tax efficient company exit route.

Significant tax savings

As a result of Extra-Statutory Concession C16 (ESC C16) being enacted into legislation, shareholders looking to wind-up the affairs of their company and extract more than £25,000 as capital, can now only do so through a solvent liquidation.

Distributions to shareholders during the course of an MVL are subject to capital gains tax, with the benefit to shareholders of a maximum tax rate of 20%. Perhaps most significantly, where Entrepreneurs Relief is available, the rate of tax could be further reduced to just 10%.

By contrast, payments to shareholders outside of a formal liquidation are treated as dividends and attract income tax at rates of up to 38.1%, depending on the recipient’s other earnings.

Company pensions contributions

I am a firm believer in the old adage “never let the tax tail wag the commercial dog”, and it is fair to say that shareholders’ prime motivation is commonly to get their hands on the cash as quickly as possible.

That is totally understandable, and probably explains why many are reticent to make company pension contributions in the period leading up to liquidation. The corporation tax saving would certainly be favourable, but they risk tying up funds in a vehicle where the subsequent drawdown could subject them, as individuals, to higher rates of income tax.

The introduction of the new pension regulations will provide more flexibility and it is undoubtedly worth considering company contributions; they just need to be viewed in the round.

Planning around the tax year end

The shareholders’ accountants and personal tax advisers will play a pivotal role in determining the mix of capital distributions and dividends around the tax year end and that will be a major factor, behind the need for funds, in dictating the timing of the solvent winding-up process.

However, it is not always a straightforward exercise when the individuals have competing tax goals, and the decision will rest on their income and gains across the tax years that may be straddled.

If, for example, the shareholders expect to have limited income as a result of the winding-up of the company, then it may be sensible to wait and declare dividends up to the basic rate, and thus free of tax, in the following tax year.

Alternatively, if utilising capital gains tax exemptions is the key motivation, then winding-up early and making distributions in the MVL in both tax years would be advantageous. The annual allowance currently stands at £12,000 for 2019/2020, and even at 10% where Entrepreneurs Relief applies, there is a saving to be had. Where a number of shareholders are involved, the collective benefit could actually be significant.

Conclusion

If you have clients who are already contemplating their exit strategy, then now is the time to take a serious look at the tax implications. There is still plenty of time to get an MVL in place by 5th April!