Potential election impact on solvent liquidation strategies

There is some significant speculation in the press and in the industry as to whether changes may be made to Capital Gains Tax (CGT) after Labour ruled out rises in income tax or national insurance.

The past provides some useful context for what the future tax landscape may look like for capital gains. We could see a realignment of CGT rates with income tax rates, as we have had this in the past - although Rachel Reeves has said that a ‘wholesale equalisation’ of income tax and capital gains tax rates could hurt investment.  

See also our article: Might we see changes to CGT after the election?

Any changes to CGT, if there are any, would not come into force until sometime after the General Election. Rachel Reeves has ruled out having an emergency Budget shortly after the General Election if they were to win. 

She said they will wait until they have forecasts from the Office of Budget Responsibility, which would take approximately 10 weeks to commission. Therefore, the first Labour Budget would likely not be until the Autumn. Any changes might come into force from that date or, more likely, from the beginning of the next tax year, from 6 April 2025.

With all of that in mind, and given the uncertainties, if you are considering winding up your company and extracting your capital, now might be the time to accelerate those plans to lock in the current favourable tax rates.

Understanding Solvent Liquidations

A solvent liquidation, also known as a Member’s Voluntary Liquidation (“MVL”), is a regulated process overseen by a licensed Insolvency Practitioner to wind up the affairs of a solvent company. 

MVLs can be used to secure an orderly and structured winding up of a company, perhaps upon the owner’s retirement or following a business sale, or to close a group subsidiary that has outlived its usefulness. Retirement and group reorganisations are two of the most common reasons for the MVLs we oversee.

With a liquidation, the responsibility for the company's affairs switches from the directors to the Liquidator upon appointment, at which point the directors' powers cease. From there, the Liquidator’s principal responsibility is to realise the remaining assets to discharge any final creditor claims and to then distribute the remaining funds and assets to shareholders, either in cash or in specie. 

Liquidation ends with the company’s dissolution.

Critically, not only do the company’s directors and shareholders benefit from the properly planned and structured nature of the process, unlike in an informal striking off, given that the responsibility for the winding down is that of the Liquidator, but there are generally significant tax benefits upon extraction too, as distributions to shareholders are treated as capital rather than income. 

Contact us

If you are an adviser or a business owner, and you wish to discuss the solvent winding-up process in further detail, please get in touch with us and we will be pleased to offer you a free, no-obligation initial consultation. 

Please contact our Restructuring Team for a conversation.

Further reading

For more insights into the election tax policies announced by the main parties, check out:

• Election Tax Watch 2024 quick guide
• Election Tax Watch 2024 detailed guide