Changes to Members Voluntary Liquidations

HMRC are making some changes to Members Voluntary Liquidations (MVL’s) from the 6th April 2019, we have received a report that outlines what they are and what impact they will have.

Until recently, most people with shares in a trading company could be confident of qualifying for entrepreneurs’ relief when they came to sell those shares. Their shareholder status meant that they would only have to pay capital gains tax at 10% instead of the higher rate of 20% and qualifying for this tax relief was quite simple. To be eligible, all you had to do was satisfy each of the following conditions for at least a full year up to the date of selling your shares:

• The company had to be a trading company, which simply put means it must be carrying on a trade rather than operating as an investment business.
• The shareholder had to be an officer or an employee of the company for the same period. Once again this was usually straightforward and indeed in most of the cases I’ve looked at the individuals concerned were directors of the company.
• The family had to be the shareholder’s “personal company” which broadly meant that the shareholder had to hold at least 5% of the shares of the company and those shares had to give that person at least 5% of the company’s voting power.

The process has always been relatively simple, but the Chancellor has suddenly moved the goalposts by announcing two major changes to entrepreneurs’ relief in his Autumn Budget speech.

With immediate effect of his announcement, the definition of a “personal company” became more onerous with shareholders now also having to have the rights to 5% or more of the dividends and 5% or more of the proceeds if the company were wound up.

What the Chancellor had effectively done was introduce a new test relating to the level of economic interest the individual has in the company.

As a direct result of these changes, some people instantly lost their right to entrepreneurs’ relief, in some cases because they held 5% or more of the shares and votes of the company but did not have rights to 5% or more of the dividends that would be paid. If this wasn’t bad enough, the Chancellor’s announcement appeared to deny entrepreneurs’ relief to shareholders with what are known as “alphabet shares”. ”Called “A shares”, “B shares” and so on, alphabet shares are designed so that a different rate of dividend could be voted on for each class of share.

Under the new rule however, even if two individuals between them held all the shares of a company, if they were alphabet shares, it is arguable that neither person had a right to any dividends until dividends were declared in respect of their class of share. This meant that neither of the two shareholders would be entitled to 5% of the dividends! My personal view was that this was not a problem, but the new test clearly made matters very uncertain. Even HMRC were not sure of the correct analysis!

Fortunately, following pressure from various sources, the Government amended this rule to provide an alternative test of whether the shareholder would receive at least 5% of the proceeds if the shares were sold. In most cases involving alphabet shares, this revised test should allow the shareholders to claim entrepreneurs’ relief, even if they are not entitled to 5% of dividends or the proceeds of a winding up.

The other change to entrepreneurs’ relief has extended the qualifying period from one year to two years, although this only comes into effect for disposals on or after 6 April 2019. So, if, for example, you hold qualifying shares which you acquired in November 2017, if you sell them between December 2018 and the end of March 2019 you will be eligible for entrepreneurs’ relief based on having held the shares for over a year. But, if the sale is delayed until after 5 April, the new two-year qualifying period applies and you will need to defer your disposal until, say, December 2019.

If you are affected by these changes or would like more advice and information on entrepreneurs’ relief, we have a skilled and knowledgeable commercial team who are available to discuss your issue.