Benefits of Business Asset Disposal Relief when using an MVL

Thank you to Opus Business Advisory Group for writing this guest post as part of their sponsorship for our event: 5 Routes to Financial Freedom. 

Business-owners who are looking to exit their company will want to achieve the best financial outcome for all stakeholders. Taking advantage of Business Asset Disposal Relief (BADR) through the controlled process of a Member’s Voluntary Liquidation (MVL) could be the ideal way in which to achieve this.  This process can also be appropriate if a ‘shell’ company is left following a management buyout of a company’s business or assets.

Why is an MVL the most profitable option?

MVLs attract favourable tax treatment since the proceeds are treated as a distribution of capital, compared with drawing funds as dividends. For shareholders, where distributable funds exceed £25,000, the tax benefits of capital treatment only flow if the company enters a formal Members’ Voluntary Liquidation.

Funds are classed as capital receipts and therefore capable of being subject to Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief before April 2020). BADR can be claimed on capital gains on qualifying shares. This is a personal tax relief which attracts a tax rate of only 10% on distributions up to a lifetime limit, which is now £1m reduced from £10m by the 2020 Budget. Now, only the first £1m will be taxable at 10 percent, with the remainder subject to capital gains tax at the prevailing main rate (ordinarily 20 percent).

Certain criteria apply to BADR, which can be found at https://www.gov.uk/business-asset-disposal-relief.

What considerations do I need to make before entering into an MVL to benefit from Business Asset Disposal Relief?

Because of the potential tax benefits of using an MVL to exit your business, there are now targeted anti-avoidance legislation which prevent a shareholder commencing a similar business following an MVL. For this reason, the process is only appropriate where there is a genuine cessation, and we strongly recommend that you speak to your accountant/tax specialist before entering into an MVL.  We regularly work with accountants to ensure the process is appropriate, and that the best outcome can be achieved for their clients.

Where appropriate, prospective clients should also consider the use of annual exemption for both dividends (prior to MVL) and Capital Gains tax, which can give a further benefit.  Additionally, an MVL can be used to distribute assets to shareholders (such as property) without a need to convert them to cash.  If you think the process may be appropriate for you or your client, please do not hesitate to get in touch.