Tax Efficient Extraction of Capital

The few weeks leading up to Budgets are normally fairly manic for our Restructuring Team, where there is often a last-minute rush to place companies into members’ voluntary liquidation (“MVL”), and then make capital distributions ahead of any potential changes to the Capital Gains Tax (“CGT”) regime. 

Fortunately, there were no such changes in the recent Autumn 21 budget, meaning the MVL route remains the most tax efficient method for extracting capital for many. 

Check out our Autumn 2021 Budget “at a glance” article

For the readers who are not familiar with MVL processes, they enable shareholders to put a solvent company into liquidation in order to unlock its capital in a tax efficient manner, as an alternative to selling the shares. 

It can be used to secure an orderly and structured winding up of a company or to close down a subsidiary that has perhaps outlived its usefulness. 

Retirement and group reorganisations are two of the most common reasons for the MVLs that we oversee.

Case Study – A Property Development Company

One of the MVLs we are currently overseeing is for a property development company where the final development was completed, and the directors wanted to retire. 

Before the MVL, we worked closely with the directors to ensure the financials were completed, claims were assessed and then settled ahead of liquidation in order to avoid statutory interest at 8% per annum. 

This is an important planning consideration in all MVLs, particularly where creditor claims are significant. 

It should be noted that statutory interest is also claimable on liabilities where the due dates arise after the commencement of liquidation.  

In this case, the use of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which provides for a lower rate of Capital Gains Tax at 10%, subject to a lifetime limit of £1 million, meant that the shareholders saved personal tax of approximately £120k. 

We had distributed funds to them within a matter of days of the MVL commencing. 

The alternative route of drawing dividends and then striking off the company was not therefore a consideration.

But there are other benefits beyond just tax savings. 

Like many other industries, the construction sector is fraught with risk and complication in terms of contingent and prospective claims. In this instance, the MVL provided the directors and shareholders with comfort that the affairs of the company had been properly concluded, which provides added protection in the event that claims arise later down the line. 

With striking off, if a claim subsequently arose and a creditor then restored the company, it becomes the director’s problem. 

If a solvent restructuring or liquidation is on the agenda, please feel free to discuss this with a member of our Restructuring Team.