How will Autumn Budget 2024 affect solvent liquidations?

As the 2024 Autumn Budget approaches (Wednesday 30 October), businesses across the UK are gearing up for potential changes that could significantly impact their operations and financial strategies. One area that’s garnering particular attention is solvent liquidations, a process that many companies consider during times of economic uncertainty or when seeking to wind down operations efficiently. With the Chancellor set to unveil the Government’s fiscal plans soon, what should business owners, investors and financial advisors know about the implications of a solvent liquidation?

What Is a solvent liquidation?

A solvent liquidation, known as a Members’ Voluntary Liquidation (“MVL”), is a legal process that allows a solvent company to wind up its affairs, pay off its debts, and distribute any remaining assets to shareholders. This process is typically initiated by the company’s directors when they believe that the business has fulfilled its purpose or when they wish to retire and there’s no succession plan in place.

An MVL is an orderly and tax-efficient way to close down a business. Unlike insolvent liquidations, where creditors are often left out of pocket, a solvent liquidation ensures that all creditors are paid in full before the remaining assets are distributed. This makes it a preferred option for companies that are still in good financial health but have reached the end of their lifecycle or want to reorganise their structure.

Potential Budget changes: What to watch for

As the Chancellor prepares to deliver the Budget, several potential changes could impact solvent liquidations:

1. Capital Gains Tax (CGT) Adjustments: There’s ongoing speculation that the Government may increase CGT rates as part of its efforts to raise revenue, potentially aligning them with income tax rates. Tax changes can take effect at any time. For example, from Budget Day, from the beginning of the next tax year, or from another date.  For businesses considering an MVL, this could mean higher tax liabilities on the distribution of assets to shareholders. If CGT rates are increased from the start of the next tax year, companies may rush to complete liquidations before the new rates take effect.  
2. Changes to business asset disposal relief: Business asset disposal relief, which offers a reduced CGT rate on qualifying disposals, has already seen reductions in recent years. Any further tightening of this relief could make solvent liquidations less attractive to business owners who are looking to benefit from the lower tax rates currently available.
3. Anti-Avoidance measures: The Government may also introduce stricter anti-avoidance measures aimed at preventing the misuse of MVLs for tax planning purposes. This could involve closer scrutiny of transactions leading up to a liquidation or new rules designed to make sure that the process isn’t used to sidestep tax liabilities. There are already targeted anti-avoidance rules in place, introduced in 2016, designed to prevent individuals converting what would otherwise be a dividend into a capital payment, and so reducing their overall tax liability.

The impact on businesses and shareholders

If significant changes are announced in the Autumn Budget 2024, businesses and shareholders will need to act quickly to reassess their options. For companies already considering an MVL, it may be prudent to initiate the process sooner rather than later to lock in current tax rates and reliefs. This is especially true if the company is looking to maximise returns for shareholders while minimising tax exposure.

For those in the early stages of considering a solvent liquidation, the potential for increased tax liabilities could prompt a re-evaluation of their plans. Companies might explore alternative strategies such as mergers or acquisitions.

Preparing for the future

Given the uncertainty surrounding the Autumn Budget, businesses should stay informed and get professional advice. Talking to accountants, tax advisors and legal professionals can provide valuable insights into how potential changes might affect your business’s plans.

Business owners should also consider the timing of their decisions. If the Budget introduces changes that will take effect immediately or in the near future, acting quickly could be crucial to preserving the value of your business’s assets and ensuring a smooth liquidation process.

Need help?

If you would like to discuss how an MVL could work for you, please get in touch with me or any other member of the Insolvency & Recovery team. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk

Lee Green