Sharing examples of how we help clients can give you a better idea of the services we provide and the value of financial planning.
This quarter we are highlighting some of the help provided to two of our newer clients, Susie Moore and Tim Sefton.
Both Susie and Tim owned their own successful brand consultancy companies growing customer lifetime value, and significant capital had accrued in both companies. They needed greater access to capital and income to meet and enhance their regular lifestyle expenditure, but the company value was, in effect, ‘trapped’. The value was also getting ever larger as cash on the balance sheet, with significant tax being due if extracted.
Susie also wanted to be able to afford to spend more time on another business initiative, a new purpose-led pyjama brand (pjoys.co.uk) that is rooted in supporting mental health.
By identifying both the issues and the opportunities relating to their personal and business affairs we were able to work closely with their existing accountant and also make introductions to an Members Voluntary Liquidation (MVL) specialist to streamline their businesses and generate significant tax savings.
What we did
Having completed an initial review, we were able to identify that both companies had real synergies between them. As such there were savings and a real advantage to be had by winding up one company, and the operating as a sub-brand of the other company.
We identified an opportunity for an MVL and made an introduction to a Licenced Insolvency Practitioner, Douglas Pinteau from WSM Marks Bloom, an expert within our professional network.
In an ideal world we would have continued to move money from the businesses into pensions rather than leaving the capital languishing in a zero-interest business account until retirement. However, both Tim and Susie have Fixed Protection 2016 to protect their Lifetime Allowances at £1.25 million so further contributions weren’t appropriate.
What did the MVL achieve?
MVLs can be a very powerful tool as a tax-efficient way of withdrawing funds/assets from a company that has reached the end of its useful life.
The procedure results in returns to shareholders being made, either as surplus cash or as other assets owned by the company (known as a distribution ‘in specie’). Distributions are usually at the start and end of the MVL although, to a large extent, they can be whenever the shareholders want. For UK residents, these are treated as capital distributions, subject to Capital Gains Tax rates rather than Dividend or Income Tax rates.
Many individuals, like Susie, may also qualify for Entrepreneurs’ Relief, which reduces the tax the shareholder pays on distributions to 10%.
Entrepreneurs’ Relief is available to individuals disposing in shares of a trading company in which they were an officer for a period of two years, holding at least 5% ordinary share capital and at least 5% of voting rights.
Relief is allowed on lifetime gains of up to £1 million, and effectively reduces the tax rate on any capital gain to 10%.
Essentially, for Susie it allowed several hundred thousand pounds of capital to be extracted from her company, taxed as a capital distribution rather than income.
Susie’s accountant confirmed that Susie qualified for Entrepreneurs’ Relief and a tax rate of just 10%, rather than 38.5% as a dividend for an additional rate taxpayer. This generated a saving of up to 28.5% of the capital released.
Now that Susie and Tim have access to the capital distribution from Susie’s company, they can generate additional income from their capital, and also better fund the lifestyle that they want in the long term. The revenue that Susie previously generated over and above her new remuneration will now be captured by Outwith, Tim’s company.
“The work that Phil [Patient] and the team at HFMC Wealth has done has really helped us, in conjunction with that of Douglas [from WSM Marks Bloom]. We knew that we wanted to enjoy the rewards of our hard work now, and it seemed crazy that we couldn’t do so without potentially damaging our long-term retirement plans or accessing investments.
“By putting together a cash flow plan, we were able to see what was affordable and really change the way we viewed our money and our businesses. We now know that what we want to do is achievable and we wouldn’t otherwise have taken the steps to begin to enjoy our work so soon.
“Recognising the synergies in our businesses meant that we were prime candidates for the MVL, and the savings and access to capital will make a huge difference to us, with savings in the high tens of thousands of pounds as a result.
“The process was ultimately simple, but we couldn’t have done it without the creativity, technical expertise and professional connections of Phil and HFMC Wealth. We were being looked after by a large family office before, but it took the expertise of HFMC Wealth to not just identify the opportunity, but to also coordinate all the relevant parties to make this happen and unlock our new future.”
Factors to consider
For Susie, the implication of these arrangements is that she is not able to simply reset up a similar new business within two years, without potentially triggering HFRC phoenixing rules (unless exceptional circumstances apply, which could otherwise mean that the capital treatment is challenged.)
Susie and Tim saw the benefits of working from the same company with one set of payroll and compliance reporting, so this was not an issue for them.
Susie has now taken an employed role with Tim’s company, and the overall tax efficiency of Tim and Susie’s affairs has improved, with capital available to fully use all their tax exemptions and allowances going forward for quite some time.
How does an MVL work? The key points
- Administered by a Licensed Insolvency Practitioner (“IP”)
- Duration – liabilities should be paid within 12 months, but liquidation can continue to allow distributions in two, sometimes three tax periods.
- Distributions – taxed as capital receipts rather than dividend income.
- CGT annual exemption – £12,300 for individuals in 2020/21.
- CGT rates – 10% basic rate taxpayer, 20% higher rate taxpayer.
- Closure – Automatic dissolution of company three months following the liquidation concluding.
Why else might an MVL be relevant to you?
While it is easy to see the MVL benefits for individual shareholders like Susie, there are good reasons for placing a company at the end of its useful life into MVL, even if the shareholders are corporate and/or foreign entities, and are as such unlikely to see the same obvious tax benefits. Here are five:
- A liquidator will be appointed to wind down the company’s affairs, saving the time and costs of the director administering the winding down of a company that will otherwise have ceased.
- The liquidator will be licensed, qualified, and independent, and will therefore ensure the funds and assets are dealt with and distributed between creditors and members correctly.
- There are statutory requirements for a liquidator to seek claims publicly from any potential creditor and set a deadline for claims to be received. This will significantly reduce the risk of claims appearing long after the company has been dissolved.
- The liquidator will correspond with HMRC through dedicated teams, ensuring all pre-liquidation tax affairs are up to date, and getting confirmation that no matters or queries are outstanding.
- At the conclusion of liquidation, the process of dissolving the company will occur automatically. There is no addition process, or fee for dissolution.
Even without the tax benefits, it could be prudent for clients with companies that are finished with to enter into MVL (unless there are less than £25,000 of distributable reserves), even if the shareholders are foreign or corporate entities. For directors, this is likely to be far more efficient that trying to wind down the company yourselves.
We will be looking to use the same approach for Tim’s company at the end of its useful working life.
If you would like to know more, please contact your HFMC adviser, who will also be able to introduce you to an MVL specialist.