Claiming Entrepreneurs Relief In A Member’s Voluntary Liquidation
For many years, company owners have been utilising a member’s voluntary liquidation (MVL) process to benefit from Business Asset Disposal Relief. Prior to April 2020, this relief was formerly known as, and still commonly referred to as ‘entrepreneurs relief’. As detailed later in this article, there is a real risk that Business Asset Disposal Relief may be scrapped in the March 2021 budget. As such, any shareholders contemplating an MVL with hopes of claiming entrepreneurs relief should act now to extract funds in the most tax-efficient manner.
What Is Entrepreneurs Relief/Business Asset Disposal Relief?
In the context of a member’s voluntary liquidation, entrepreneurs relief means that shareholders will only have to pay 10% tax on any funds or assets distributed to them by the insolvency practitioner.
By contrast, any funds distributed to shareholders of an active company are treated as dividend income and taxed at the following rates (for the 20/21 tax year):
| Income | Tax Rate |
|---|---|
| Up to £37,500 | 7.5% |
| £37,501 – £150,000 | 32.5% |
| £150,001 + | 38.1% |
The reason for this is that funds paid to shareholders in an MVL are treated as a capital distribution and effectively a realisation of shares as if they were disposed of.
Is Entrepreneurs Relief Only Available In A Member’s Voluntary Liquidation?
It is important to note that company owners do not have to place the company into an MVL to benefit from Business Asset Disposal Relief.
The alternative would be for the directors to undertake an orderly informal winding up of the company’s affairs and then apply for a company strike off. Up until March 2012, Extra Statutory Concession C16 (ESC C16) allowed unlimited funds to be distributed in an informal winding up being available for entrepreneurs relief. Changes to tax legislation in 2012 meant that shareholders can only apply for entrepreneurs relief on reserves up to £25,000 if they decide to go down the strike-off route.
If the company has reserves in excess £25,000, shareholders must instruct an insolvency practitioner to implement a member’s voluntary liquidation to avoid funds distributed being treated as income for tax purposes.
Will I Qualify Business Asset Disposal Relief?
As with most tax reliefs, claiming entrepreneurs relief is only possible in certain circumstances. Critically, in order to be able to benefit from it, the company must be a ‘close company’ and the shareholder must hold at least 5% of the company’s shares, and have done so for a period of at least 2 years prior to their disposal (or prior to the member’s voluntary liquidation in the context of this article.)
Further restrictions were introduced as part of the Targeted Anti Avoidance Rules (TAAR) in 2016 to prevent abuse of the available relief. TAAR provides that in order to benefit from entrepreneurs relief in a member’s voluntary liquidation, the shareholder must not trade in the same or a similar industry to the liquidated company within 2 years of claiming the relief.
The lifetime allowance for assets available for entrepreneurs relief decreased from £10 million to £1 million in March 2020 to coincide with the rename to Business Asset Disposal Relief.
Is There A Risk That Business Asset Disposal Relief Will Be Scrapped?
As outlined in this article, tougher restrictions have been implemented in 2012, 2016 and most recently 2020 limiting the availability of entrepreneurs relief in a member’s voluntary liquidation, or otherwise.
It has been suspected by insolvency practitioners and tax experts alike that further changes will be made, or indeed the relief may be scrapped completely. This was last mooted in anticipation of the Autumn 2020 budget, which did not happen due to the ongoing effects of the Covid-19 pandemic on the UK economy.
Many predict that the scrapping of Business Asset Disposal Relief will once again be ‘on the cards’ for the March 2021 budget as the UK government began to implement plans to recover funds having paid out billions of pounds in business support packages since March 2020.
In an attempt to mitigate their tax liabilities, many company owners are now considering placing their company into an MVL process to ensure they benefit from entrepreneurs relief before the March 2021 budget. As long as the insolvency practitioner distributes funds to shareholders before the budget, those funds will be treated as a capital distribution and available for entrepreneurs relief. Those preferring to wait until the budget is announced risk being penalised by future changes to tax legislation.
If you’re interested in claiming entrepreneurs relief and would like to discuss a member’s voluntary liquidation further, don’t hesitate to contact us for some free, no-obligation advice. If you would like a simple quote for an MVL please use our simple online MVL quoting tool.
