Major tax changes for Solvent Liquidations: time for urgent action!
Just before Christmas, the Government published a consultation document outlining its intention to make radical changes to the taxation of distributions to shareholder individuals made through a Members Voluntary Liquidation (MVL). Their rationale is that it is unfair that some people can, in certain cases, arrange their affairs solely to take advantage of lower tax rates. Distributions to shareholder companies will not be affected.
The changes are mainly focussed on “moneyboxing” and “phoenixism”. The first is where profits are allowed to accumulate in a company, which are then extracted in capital form by way of an MVL. The second is where a trade is carried on in a company (eg: a property development) and when the project is finished the profits are taken out as a capital distribution through an MVL.
The Government is proposing to amend the Transactions in Securities legislation to treat both these types of distribution as income rather than capital. For many clients this will see tax rates increase from 10% (with Entrepreneur’s Relief) to 38.1% with the new 7.5% dividend surcharge.
It is also threatening to introduce a new Targeted Anti-Avoidance Rule, which would prevent some distributions in a winding-up being taxed as capital, where certain conditions are met and there is an intention to gain a tax advantage.
This consultation ends on 3 February 2016 and it is likely that these changes will take effect from 6 April 2016 on all distributions made after this date.
So time is very short to distribute funds on those MVLs already in progress or to distribute funds on any new MVLs, which are at the advanced planning stage. Despite these proposed tax changes, there remain substantial benefits from closing a company through an MVL. Entrepreneurs’ Relief will still be available on genuine cessation of business, but clearly certain tax advantages are under review.