How to extract end-of-life value from an investment vehicle?


Henry Page

How to extract end-of-life value from an investment vehicle?  3

Louise Byrne

By Henry Page and Louis Byrne at Mercer & Hole

Investment or special purpose vehicles are created to carry out a specific project, whether it is an investment, a joint venture or another opportunity identified by the investor (hedge fund, P/E or family office). By its very nature, the vehicle will have a limited time horizon and when the project is completed, or the investment matures, unless there has been a sale of shares, the investor will hold shares in a essentially inactive society.

The business may literally be dormant or hold mature assets, such as property, shares, or cash that need to be extracted from the business shell.

It can often be advantageous to close the business and extract the assets for the benefit of the shareholders through a voluntary member liquidation (MVL). An MVL is tax efficient, in that in most cases distributions will be at the capital tax rate rather than being taxed as income. In addition, when the criteria are met, Business Asset Disposal Relief, can apply to individual investors, further reducing the tax burden on exit.

What is an MVL?

An MVL is a legal process to end the life of the business when, for example, an SPV has fulfilled its purpose or the business has gone out of business. A registered insolvency practitioner is appointed to deal with the remaining assets and liabilities, with any residual balance being distributed to shareholders after the HMRC authorization form.

Directors are required to sign a declaration of solvency that the company can pay its debts with interest within 12 months of its liquidation. A statutory process is in place to deal with claims from creditors.

Once all tax returns have been filed to the satisfaction of HMRC, known creditors have been settled and cash/assets have been distributed to beneficiaries, the liquidator will provide a final account to complete the liquidation and the company will be dissolved.

What are the benefits?

An MVL can be used to simplify complex and unnecessary structures. Cost savings are made on ongoing professional fees and it removes ongoing filing requirements with Companies House. It also provides greater certainty for directors and shareholders as opposed to voluntary delisting.

It is important to note that the liquidator has the power to distribute assets in a form other than cash to shareholders in cash.

An MVL is a tax-efficient method of distributing a company’s assets. Distributions will be treated as capital rather than income. This could be particularly useful in family office businesses. In some cases, shareholders may be eligible for Disposal of Business Assets Relief (formerly Entrepreneur Relief), which can reduce the tax rate to 10%. With planning, distributions can be made at the start of liquidation or scheduled to span two tax years.

How to prepare for liquidation

First, talk to your advisers, whether it’s your accountant or your lawyer, as they can direct you to a recommended liquidator. Then consider what you want to achieve from the output. Distribution of non-cash assets such as property is possible and therefore it may not be necessary to liquidate all non-cash assets.

It is likely that there will be a need for some degree of storage. Depending on the beneficiary’s preference, it may often be advisable to “clean up” the balance sheet before liquidation by:

  • Liquidate non-cash assets that you do not intend to distribute in cash, such as the accounts receivable book; and
  • Pay as many creditors as possible.

While a liquidator will be able to manage assets and liabilities during the liquidation, a “cleaner” balance sheet will reduce the professional costs associated with the liquidation, as well as the statutory interest (8%) on creditors’ claims.

Then think tax! Post-liquidation distributions may generate a capital gain for the beneficiary. In corporate group structures, it may be advantageous from a tax perspective to report remaining cash distributions prior to liquidation.

Ensure that contractual obligations are terminated or novated, for example leases of premises, hire-purchase agreements and employment contracts. Also consider closing the company’s PAYE scheme and opting out of VAT.

It will, however, be necessary to retain the company’s existing accountants to file final corporate tax returns until liquidation.

Then determine if the company retains any valuable intellectual property and close inactive bank accounts.

Using the solvent liquidation process will allow investors to conclude the life of an investment vehicle in a tax efficient and professional manner. Return value to investors and ensure an independent process to settle creditor claims, reassure directors. As with any transaction, planning and taxation are essential elements to ensure that the beneficiary’s objectives can be achieved. It is therefore important to have initial conversations early in the process.

Henry Page is a partner and Louis Byrne head of the corporate restructuring team at Mercer & Hole accountants. Visit www.mercerhole.co.uk.

Previous How close is today's oil market to the crude crisis of the 1970s?
Next Michelmersh to launch world's first 100% hydrogen fired clay bricks – Show House