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The Future of MVLs as Changes to CGT Lie Ahead

This blog was written prior to the announcement that the budget was scrapped. Please see our next blog for the latest news and our thoughts on this.

As we reflect on 2020, it has been a polarising year so far with some businesses having their best year ever and others struggling to see what the future looks like. We can be under no illusion that in general terms the cost of the pandemic has been felt by many, and in particular the Government, who has supported the economy with an unprecedented package of fiscal measures.

As we begin the rebuilding process, the Government is going to come under increasing pressure to recoup the money spent and to plug the gap in the Country’s finances. Given the fragility of the economy and facing a potential for a hard Brexit, the Chancellor has limited options at his disposal. For a long time, the disparity between income tax rates and Capital Gains Tax (“CGT”) rates has been widely acknowledged, particularly with Entrepreneurs Relief (“ER”), and it should therefore come as no surprise that CGT rates are likely to be increased or for ER to be curtailed in the forthcoming budget.

What does this mean for me?
If you’re not familiar with an MVL, please take a look at my previous blog which explains the process of a solvent liquidation in more detail. For this blog, I want to focus more on the key question of whether a business owner should accelerate their retirement plans to extract value at the existing CGT rates. This is made more poignant given the impact of the pandemic and the need to understand how profitable the business will be in the forthcoming years. If the forecasts show a relatively modest profit, with the risks that this brings and factoring in the potential increases to CGT rates, it could make retirement look more attractive.

By way of a recap, an MVL is a formal process to wind up the affairs of the business and, after repaying all the creditors, the surplus is distributed to shareholders. During this process, these distributions can be treated as a return of capital subject to CGT rather than taxed as income or dividends. Shareholders who also meet the criteria are able to claim Entrepreneur’s Relief (or Business Asset Disposal Relief as it is now known), which can bring the rate of tax payable on distributions down to 10% on the first £1 million of lifetime gains.

Is your retirement a genuine retirement?
Whilst this can be a notable advantage, anyone looking to benefit from this process must also be aware of the Targeted Anti-Avoidance Rule (“TAAR”). HMRC has the power to reclassify capital payments as income payments if it thinks that the distribution has been set up for the purposes of gaining a tax advantage. The income payments could potentially be taxed as high as 38.1%; a significant increase and something all business owners should be aware of.

The TAAR is designed to target business owners who use the closure of a business as a tax efficient way to release funds, but then continue to carry on with the same or substantially the same activity with a new business within two years of the closure of the first business. If you genuinely wish to retire, then the TAAR will simply not apply to you. However, it’s always vital to properly explore all future plans if undertaking an MVL. For example, if you were to decide to come out of retirement at a later stage and start up again, this could be costly.

Changes Ahead
Whilst this is all positive news for retiring business owners as it currently stands, things may be looking quite different later this Autumn. As mentioned at the start of this blog, the media have widely reported that changes are expected to be announced in the Chancellor’s Autumn statement. There is the real possibility that CGT and Income Tax rates will be aligned and ER could be scrapped altogether.

Whether these changes will go ahead or what the implications on business will be is still yet to be seen. If after reading this blog you would like to explore the financial outcomes of ‘retire now’ versus ‘carrying on’, please talk to us at BLB Advisory. We can work with your existing advisers to help find the best outcome for you.