12th March 2020
By Steve Markey, Associate Director at Leonard Curtis, providers of the Lifecycle accountancy network
When I wrote a piece back at the end of January (here) we were worried that, based on widespread speculation within the accountancy profession, Entrepreneurs’ Relief (ER) was likely to be under threat in, what at that point, was Sajid Javid’s first budget.
Six weeks, and a change of Chancellor later, I’m pleased to report that our new Chancellor, Rishi Sunak, took a relatively lenient view over ER in the budget yesterday.
The good news is that ER will continue to allow qualifying cases to benefit from a 10% Capital Gains Tax (CGT) rate, which is a much more palatable percentage than the standard 20% CGT rate or even higher Income Tax rates.
The key change though is that the lifetime limit was reduced from £10m to £1m and is effective for disposals made on or after 11 March 2020. According to government research, this will mean that over 80% of taxpayers using the relief will be unaffected by the reduction in the lifetime limit. Gains above the lifetime limit will be charged at the standard 20% rate.
We work with many business owners who want to close a company via a solvent, Members’ Voluntary Liquidation (MVL) because, under tax legislation, distributions of cash and other assets made by a Liquidator in an MVL are generally treated as capital rather than income and therefore benefit from lower tax rates. As noted above, even with a reduced ER limit, paying 20% on the balance would still generally be cheaper than paying Income Tax.
Who could benefit from an MVL
In the SME arena – where Leonard Curtis operates – we tend to work with accountants and their business owner clients who are retiring or have sold the business through the limited company. It’s also an effective way to wind up businesses set up for a specific project that has been completed, when the profits and accumulated reserves must be extracted from the company by its shareholders.
MVLs also continue to be a popular route for those accountants whose freelance contractor clients need to wind up their personal service companies ahead of IR35 being rolled out to the private sector this April.
Adding value and expertise
Whilst many MVLs can be quite straightforward, there can be a number of complicating factors. This is why it is important to take specialist advice before beginning the process. At Leonard Curtis, the specialist MVL team works in partnership with accountants to ensure that the best possible solution is secured for their clients.
Given that the potential for ER is going to remain, then MVLs will continue to be a tax-efficient way for shareholders to extract value from a company. So if you have any clients who would like some advice then don’t hesitate to get in touch.