Article by Laura Walshe of The Business Debt Advisor
Under the current legislation it is possible to pay less Capital Gains Tax when selling, or disposing of, all (or part) of your business. Entrepreneurs’ Relief enables a business owner to pay tax at 10% on qualifying assets and gains, after the annual exempt amount. It is claimed as part of a personal tax submission for the period in which a capital distribution is received, and the following criteria must apply:
- The shareholder must own at least 5% of the shares;
- They must have been owned for at least one year prior to disposal;
- The assets must be distributed within three years of cessation.
However, the government pledged to ‘review and reform Entrepreneurs Relief’.
The measure was first introduced in 2008 and it can be extremely valuable for business owners, and contractors. Although it is not clear what reforms could be made, a recent article by the Financial Times indicated that the Treasury could remove the relief entirely, in consideration of the tax revenue it considers is lost as a result.
Although the policy has been subject to criticism, industry bodies have been quick to defend it. In January 2020 Suren Thiru, Head of Economics at the British Chambers of Commerce commented that scrapping Entrepreneur’s Relief risked “undermining some of our most promising young firms and entrepreneurs by stifling investment” as well as damaging the perception of the UK as start-up friendly environment.
Coupled with the upcoming changes to IR35 off payroll reforms (which come into force in April 2020) there will be many contractors with straightforward personal service companies that are no longer trading, and have substantial cash reserves. Generally, if a company is closed by a contractor who is not considering setting up another entity, it could be appropriate to obtain a capital distribution via Members’ Voluntary Liquidation.
What is Members Voluntary Liquidation (MVL)?
The process can vary from case to case. But in general terms, the director(s) will need to be satisfied that the company is solvent, meaning that it can pay its debts in full, plus interest, within a period of 12 months.
At a General Meeting the company will pass resolutions placing it into MVL and appoint a Liquidator. The Liquidator will distribute surplus assets (usually cash) to shareholders as quickly as possible. If the circumstances are straightforward then an initial distribution could be made within 24 hours of the appointment. The main advantage is the opportunity to benefit from Entrepreneurs’ Relief.
What is the Targeted Anti-Avoidance Rule (“TAAR”)?
The TAAR was introduced as part of the Finance Bill 2016, and apply to capital distributions in the winding-up of a limited company where certain conditions are met. The measures were intended to strengthen existing rules and enables HMRC to treat such distributions as income, in the following circumstances.
- Where an individual, who is a shareholder in a close company, receives from that company a distribution in respect of shares from a winding-up; and
- within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity (directly or via an associate); and
- the arrangement(s) have a main purpose, or one of the main purposes, of obtaining a tax advantage.
Clearly, if reforms are imminent there may be very little time for business owners and contractors to take advantage of the current relief. Although the process of placing a company into MVL and appointing a liquidator can be fairly swift, there is a clear incentive to act now. It is still possible to get a company into MVL and a distribution made prior to the budget on 11th March 2020 (based on the worst case scenario).
If you have any queries please fill out our Contact Form and we will be in touch. Alternatively, call our FREE ADVICE LINE on 0800 781 0990. Our team has extensive experience in dealing with solvent liquidations and can arrange an initial consultation at no cost, usually on the same day.