Thinking of putting a company into Members Voluntary Liquidation (“MVL”) ? Warning of mooted change from HMRC
Accountants have long been aware that an MVL is the most tax efficient means of extracting accumulated profits from a company following the cessation of trading. As distributions from a liquidation are taxed on shareholders as capital gains, Entrepreneurs’ Relief, (“ER”), often becomes available typically reducing the rate of tax paid to just 10% plus an annual allowance of £11,100. This compares very favourably to the effective dividend tax rate of 25% assuming shareholders are higher rate tax payers with the advantage being greater still if they are additional rate tax payers.
HMRC has now issued a consultation document which questions whether distributions from liquidations from 16/17 onwards should be taxed as income rather than capital gains.
If implemented, this would seriously disadvantage entrepreneurs looking to utilise the MVL route to extract profits.
Our interpretation of this paper suggests that if the shareholder has no involvement in the same trade as the liquidated company in the following 2 years, the tax treatment post April 2016 should remain as it has always been. However, it does give an indication that the future intentions of HMRC might be to crack down on what they perceive to be an unfair means of tax avoidance.
Risk adverse directors may therefore wish to commence any planned MVL sooner rather than later so there can be a distribution of funds before April 2016.
Do you have any clients with large reserves in their company? Put them in touch with Lynn Gibson of Gibson Hewitt today on 01932 336149 or email lynn@gibsonhewitt.co.uk. We can discuss the benefits of Entrepreneurs’ Relief and guide them through the entire process.
