Thursday March 4, 2021

Restructuring Advisory Partner, Glyn Mummery and Corporate Finance Partner, Adrian Alexander discuss what the Spring Budget means for business exits

Chancellor Rishi Sunak has now delivered his Spring Budget – a spending plan navigating the constraints of supporting the country on the road to economic recovery and re-balancing public finances following a year of coronavirus disruption.

One area where potential change had been suggested pre-Budget was to Capital Gains Tax (CGT), a regime that has been under scrutiny following a recent appraisal of the system by the Office of Tax Simplification (OTS).

Potential changes, built on the OTS’ recommendations, included raising CGT rates to align with those of income tax, and changing the qualifying conditions for Business Asset Disposal Relief (BADR).

Both of these would have had implications on a wide range of personal asset and business share disposals – including those carried out through a Members’ Voluntary Liquidation (MVL).

An MVL is a formal liquidation process for solvent companies, offering favourable tax benefits. When a company is liquidated through an MVL, proceeds are re-distributed to shareholders as capital – taxed at relevant CGT rates, and, where eligible, enabling business owners to secure tax-relief through the BADR.

At the despatch box, the Chancellor announced a freeze on the CGT annual exempt amount – the gains you can make tax-free – until April 2026. No further changes were announced.

However, more change could still be on its way. A suite of tax consultations is expected on 23 March, and additional tweaks to the tax regime could be unveiled in the Autumn as the Chancellor continues to look at ways to increase revenue to the Exchequer.

As it stands, MVLs remain an attractive option for those looking to extract value from a solvent business in a tax-efficient way but do not wish their company to continue trading and to sell it to a third party or to their management team.

While we usually see an increase in MVL volume ahead of government budgets in anticipation of potential tax changes, we could continue to see higher-than-average levels of activity in the coming months. Particularly as company owners look to maximise the value they can extract from their businesses before changes to the IR35 off-payroll working regulations in April, and ahead of any potential tax changes later in the year.

With this in mind, it’s essential that business owners looking to realise value from their operations take the time now to put their exit plan in place.

As part of this, they will need to factor-in wider implications that liquidating a business could involve.

For example, some businesses may need to purchase run-off insurance to cover any historical liabilities that arise post-liquidation. Business owners and partners will need to determine whether this applies to them, and ensure they understand their specific coverage needs.

It will also be important to carefully consider in advance any liabilities that will crystallise once a business has been liquidated. Firms may need to put a plan in place for exiting leases, for example, as well as meeting any ongoing obligations to staff.

Where business owners decide to exit by selling their company, there are a number of paths to consider.

This could involve a trade sale, a sale to the management team (‘MBO’) or a ‘two step’ exit of the business to management (where the owner retains part of the business until their final exit at ‘step two’). An alternative is the creation of an Employee Ownership Trust – selling between 51 per cent and 100 per cent of a business to a trust, which benefits all of the employees who already have a vested interest in continuing its success, without incurring CGT. Should CGT changes be announced later in the year, this is an avenue that could see increased attention.

The path ahead for CGT remains uncertain, but for now business owners have a new window of opportunity in which they can continue to realise value at the existing rates. Proactively seeking advice and support will ensure owners are in the best position to make their MVL or exit a success.

Now is the time to review, adapt and evolve. Our team of specialist advisers are on-hand to support every step of your business journey, providing integrated and tailored guidance that empowers your business to prosper in the new economy. If you are keen to assess your options, please don’t hesitate to contact us.