Chancellor’s attack on use of Solvent Liquidations

Time is of the essence if your clients wish to avoid having to deal with the new rules.

Under the current rules, a distribution to shareholders from a solvent liquidation (MVL), is treated as capital rather than income. Where entrepreneur’s relief is available, this could be taxed at a rate of as little as 10%.

The Finance Bill published on 9th December 2015 has restricted the tax relief available, in certain circumstances, for any distributions made after 5th April 2016, regardless of the date of the liquidation. The idea is to counter the use, or abuse, of MVLs where the shareholder is not retiring but is going to carry on a similar business in the near future.

To achieve this, distributions from an MVL will be treated as income and taxed at a marginal rate of up to 38.1% if the 3 conditions are all met;

  1. The person receives a liquidation distribution as a shareholder in a close company, and
  2. Within two years after the distribution, that person is involved in a similar trade or activity, and
  3. The main purpose, or one of the main purposes, of the liquidation, was the obtaining of a tax advantage.

The final point clearly offers some scope for dispute and negotiation but if the three criteria are met then entrepreneurs will effectively face an extra tax burden if they go back into a similar business within 2 years after the date that the last distribution was made from the liquidation. In liquidations which cannot be concluded rapidly, the period at risk could be substantially longer than two years from the date of liquidation; particularly if there is a need to keep the liquidation open to collect deferred disposal consideration or Corporation Tax refunds.

How Can We Help?

At EWS we move quickly and have over 20 years’ experience of assisting companies with solvent liquidations. We pride ourselves on providing a professional and swift service to intermediaries and clients alike. Should you wish to discuss the implications of the change for you or your clients then we would be only too happy to provide an initial consultation free of charge. Contact us.