Tax Efficient Way to Dissolve a Business Partnership
When considering a business partnership, there are two distinct types of dissolution depending on whether one partner wants to carry on trading, or if the entire operation will cease to exist.
Technical: when one partner leaves and another joins – the business carries on trading.
General: the partnership is wound up, the business ceases to exist, and partners take funds from the organisation, assuming it is solvent.
The Partnership Act 1890 regulates this type of action and describes the reasons why business partners might want to dissolve their agreement. But, assuming that a general dissolution is taking place – maybe the partners are retiring – a Members’ Voluntary Liquidation offers the most benefits in terms of tax efficiency.
Begbies Traynor have experienced Insolvency Practitioners available for appointment to handle this procedure and can guide you through the process to ensure compliance with all legislation, and ensure that you dissolve your partnership in the most tax-efficient way.
What is a Members’ Voluntary Liquidation (MVL)?
The main eligibility requirement for entering a Members’ Voluntary Liquidation is the solvency of the business. All directors are required to sign a declaration to this effect, stating that the business can pay its debts, including interest, within a period of 12 months, although it is often the case that a solvent partnership is dissolved well within this timescale.
Tax treatment of capital following an Members’ Voluntary Liquidation
Entering into a Members’ Voluntary Liquidation offers huge benefits as far as the tax treatment of capital is concerned. Capital released from the business attracts Capital Gains Tax (CGT) rather than income tax regardless of the amount involved, which means a vast reduction in how much tax you will have to pay as a former director.
The current rates of Capital Gains Tax are 18% for basic rate taxpayers, and 28% for those paying the higher rate of tax. With income tax rates being 20% and 40% respectively for basic and higher rate taxpayers, it is easy to see why this is a popular option for partnership dissolution, particularly on retirement.
Directors may also be able to take advantage of Entrepreneur’s Relief, which was introduced to encourage people into business by providing tax relief on dissolution.
In order to be eligible for Entrepreneurs’ Relief, you must have owned the business for at least a year before liquidation. Qualifying assets may attract 10% tax instead of 18% or 28% as mentioned above, and if shares are being sold you must hold a minimum 5% of ordinary shares and voting rights.
If you deduct your CGT allowance from your gain on disposal, you owe 10% on the remaining assets that qualify for this relief.
The process of entering into a Members’ Voluntary Liquidation
As previously mentioned, the business must be in a solvent position to be eligible for Members’ Voluntary Liquidation. This is why it is vital to have all business assets valued professionally by a licensed Insolvency Practitioner, who can also calculate your liabilities to ensure that the Declaration of Solvency is valid.
Begbies Traynor accepts appointments in this regard, and our people have vast experience of this type of liquidation. Our licensed Insolvency Practitioners provide accurate valuations of assets, including all contingent liabilities, to ensure your company is in an unquestionable position of solvency.
Some directors make the mistake of assuming solvency simply by looking at their accounts. Unfortunately, one of the requirements of this formal procedure involves advertising your company’s voluntary liquidation publicly in The Gazette.
It has been known for other creditors to place new claims on company assets on seeing the advert, subsequently sending the company into a position of insolvency when the directors thought their company’s financial position was nothing but positive.
Begbies Traynor has licensed Insolvency Practitioners across the UK who can guide you through a Members’ Voluntary Liquidation. We offer a free initial consultation at your local Begbies Traynor office – just contact a member of our expert team to discuss your circumstances.