MVLs – A window of opportunity?

In his blog of 20 June 2024, my colleague Youcef Toumi reflected on the contents of the party manifestos in relation to tax.

The election outcome prompts us to focus on the Labour Party manifesto which provides hints on the direction of tax policy under the new Government.

As Youcef observed, Rachel Reeves has made much of the Government’s fiscal responsibility and emphasised that the Office of Budget Responsibility (OBR) will have full input into all fiscal statements.

This is understood to mean a 10 week period for the OBR to consider the new Government’s proposals. That means that the earliest a financial statement/budget can be made is the second half of September.

Target capital gains tax (CGT)?

Labour did not exclude the possibility of increasing CGT rates in its manifesto. This is therefore a legitimate area to focus on. Given the imperative to raise more tax, there is the distinct possibility that there will be a narrowing, perhaps even a removal, of the difference between income and CGT rates.

This would have a very material effect on the net return to shareholders who have built up value in their companies and are thinking now of extracting that value.

Members voluntary liquidations (MVLs)

A common way of taking advantage of the CGT rate is to put a company into MVL following which any distribution by the liquidators to shareholders is a capital distribution attracting the lower tax rate.

If this window is about to close, how quickly can a company be put into liquidation and a distribution achieved? It takes time to prepare a company for liquidation. Its assets ought to be substantially realised (perhaps by way of a sale of the business) and the balance sheet tidied up to leave a clean position for the liquidator to distribute assets.

There are flexibilities within a liquidation regime. Notably, the ability to distribute assets (perhaps properties) in specie to shareholders.

That said, 10 weeks is a fairly short period in which to plan and effect an MVL and for the liquidator to make the distributions (this needs to happen before any change in the tax legislation).

Watch out for anti-avoidance

Proper rationale is necessary for company liquidation. Anti-avoidance rules prevent shareholders or directors from liquidating a company to gain a capital gains tax advantage. Though they can start a similar business in a new entity shortly afterwards.

We can help to navigate all the issues.

If you have a company which may be suitable for a liquidation please get in touch.