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Members Voluntary Liquidations and Capital Gains Issues

Update: December 2007

Alistair Darling’s first Pre-Budget Report on 9 October 2007 introduced sweeping changes to the capital gains tax regime.

Since then the CBI, The Forum for Private Businesses, Chambers of Commerce and other agencies, as well as most daily newspapers, have sought a radical rethink. Whilst there are some early signs that the proposals may be modified, we are receiving a large number of calls from accountants seeking guidance on the procedures to liquidate a business. We hope that you find theses notes helpful.

Taper relief, both “business asset taper” (reducing gains by up to 75%) and “non-business asset taper” (reducing gains by up to 40%) will be abolished from 5 April 2008 and the new regime provides for chargeable gains (after deducting losses and annual exemptions) to be taxed at 18%.
This could mean, for some, an increase in the effective rate of tax suffered from 10% to 18%.

Inevitably some clients holding assets such as shares in a private trading company that would benefit from full business asset relief may wish to trigger a capital gain before 5 April 2008 so that they can benefit from a 10% rate.

For those wishing to make a capital distribution via Members Voluntary Liquidation it is important to be aware of the procedural time constraints to enable a distribution before the 5th of April deadline.
14 days notice is required for a General Meeting to pass a Special Resolution to place the Company into Liquidation. This can of course be abridged with the consent of 90% of shareholders.

The Liquidator is required to give 21 days notice to creditors to prove in the Liquidation. Once the 21 days have elapsed the Liquidator can be confident in making a distribution to the shareholders although this will be subject to an indemnity being provided by the shareholders. In certain circumstances it is possible for the Liquidator to distribute assets before the 21 days have expired, but this cannot be done in cases where there is a likelihood of a dispute with a creditor.

There are other practical issues to consider which may have a significant impact on the ability to make a distribution before the deadline:

• Realisation of the relevant assets;
  
• Corporation Tax computations to date of Liquidation; and
  
• Business sale warranties could delay a distribution where a purchaser puts the Liquidator on notice of a potential claim. Purchasers could use this to leverage a position in their knowledge of a tax deadline. If possible it would be beneficial to have a clause in any sale agreement consenting to a transfer of the claim to the shareholders in the event of a distribution being made. That claim should of course be limited to the value of the distribution.

For those wishing to use extra statutory concession C16 it is important to remember that it is technically illegal to return a company’s share capital to its members other than by Liquidation. The Treasury Solicitor has however confirmed that any distribution of share capital of less than £4,000 pursuant to extra statutory concession C16 will not be treated as an unauthorised distribution. Any distribution of share capital above this sum gives a right of recovery against the members which passes to the Crown as bona vacantia on dissolution.

In summary, to be safe accountants should leave at least six weeks before the tax year end to commence members' voluntary liquidation proceedings although in practise realising assets and obtaining the appropriate tax clearance should be commenced well before this.

If you would like assistance with a client liquidation or any further advice, please speak to me on 0114 275 5033.

Jeremy Priestley, Managing Partner.

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