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Imminent changes to the tax rules which will effect Entrepreneurs relief

During the last few months, we have seen a significant increase in the number of Members’ Voluntary Liquidations (MVL’s) amid fears of an imminent tightening of the tax rules which will effect Entrepreneurs’ Relief.

Entrepreneurs’ Relief is an attractive tax break for shareholders who have sold their businesses or wish to retire, and have a pot of money held in a company that they wish to extract in as tax efficient manner. Under the present ‘Entrepreneurs’ Relief’, business owners are taxed at 10% on capital gains of up to £10m, compared with the normal capital gains rate of 28%.

During the last couple of years, HMRC has tightened up on some of the more peripheral aspects of the relief but, in late 2015, they announced a particularly unwelcome piece of news. It has been suggested that the prospect of a 10% tax rate has led certain individuals to structure their business activities to utilise this rate. One way in which this might happen is for company profits to be retained and then released later by placing the company into liquidation. As a consequence, HMRC may wish to reconsider certain transactions and tax them not as capital gains but as income. It is possible that the receipts in the liquidation might, in certain circumstances be taxed as income. If enacted, this is likely to significantly increase the amount of tax payable on these receipts.

This legislation is likely to be introduced on the date of the Budget on 16th March 2016 and it is possible that other changes in Entrepreneurs’ relief may accompany this.
It is essential for shareholders to seek tax advice from their accountants or tax advisers, as this will be the key to deciding the most tax efficient route to take when deciding how to distribute surplus company funds to shareholders.

A few years ago, we introduced a QuickCap members’ voluntary liquidation. QuickCap facilitates a distribution of company funds to shareholders, as a return on capital, which in most cases qualifies for Entrepreneurs relief. Once the company is in members’ voluntary liquidation, it is possible to distribute funds to shareholders immediately.

What are the benefits of a QuickCap Members’ Voluntary Liquidation?

  • Capital distributions are usually more tax efficient than income distributions.
  • The shareholders usually benefit from Entrepreneurs Relief at a tax rate of 10%.
  • Funds can be distributed to shareholders immediately.
  • Funds can be distributed in two tax years thereby using both years’ capital gains tax allowances.
  • Directors’ loan accounts or cash equivalent assets can be distributed in specie.

At Portland, we charge a low cost fixed fee of £2,500 plus disbursements for a QuickCap. For more complex MVL’s, we are happy to provide a quote.

Call us today to find out more as time is running out.

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