A Members’ Voluntary Liquidation is a shareholder-led process and can be a tax efficient way to close a solvent company.
It is usually used by shareholders wishing to close their company and withdraw their capital.
All creditors of the company are paid in full and any remaining funds are distributed to shareholders.
Reasons why the shareholders may wish to shut down a solvent company include:
- The company has ceased trading and the shareholders want to “unlock” the value of the business.
- The retirement of directors/shareholders.
- When directors/shareholders are in dispute and want to go their separate ways.
- As part of a company restructure (under S.110 of the Insolvency Act)
Groups of companies may also include dormant subsidiaries.
To prove a company is solvent, a majority of directors must swear a Declaration of Solvency, incorporating a Statement of Affairs.
- This confirms that they have made a full enquiry into the company’s financial affairs and have decided that the company can pay all its debts in full plus interest within a 12-month period.
- The Declaration of Solvency includes a simple form of balance sheet for the company, as of the date it is placed into liquidation.
At Bretts Business Recovery, we help you prepare the Declaration of Solvency.
Since 1 March 2012 HM Revenue & Customs Extra Statutory Concession C16 (ESC C16) introduced a cap of £25,000 on the amount payable on the dissolution of a Company, which can be treated as a distribution of capital rather than income.
The main advantage of an MVL is that all distributions made to the shareholders in the liquidation are classed as distributions of capital, rather than income.
- Capital distributions are subject to capital gains tax, rather than income tax, which is charged at a lower rate.
- The tax payable by the shareholder may be further reduced by applying the various capital reliefs that are available, including Entrepreneur’s Relief.
(Specialist tax advice should be sought from your accountant or tax advisor and all options explored when considering closing your solvent business).
In an MVL, the shareholders control the appointment of the Liquidator, not the creditors who will be paid in full.
- A meeting of the shareholders is held, where the company is placed into Liquidation and a Liquidator appointed.
- If, during the administration of the liquidation, the Liquidator decides there are insufficient assets to settle creditor’s claims in full, then the MVL can be converted to a Creditor’s Voluntary Liquidation (“CVL”) i.e. an insolvent liquidation.
- Before concluding the liquidation, the Liquidator shall need to obtain the appropriate tax clearances from HM Revenue & Customs.
Changes to Members Voluntary Liquidation and Entrepreneur’s Relief
What is Entrepreneur’s Relief?
Entrepreneur’s Relief allows shareholders to pay a lower rate of capital gains tax on any distributions received through a members’ voluntary liquidation of a solvent company
If a business owner winds up a solvent business using a member’s voluntary liquidation (MVL), shareholders may be entitled to pay, for example, 10% Capital Gains Tax via entrepreneur’s relief on the distribution that they receive. This is much more favourable than the standard rate of capital gains tax.
Entrepreneur’s relief conditions
Entrepreneurs’ Relief is a tax benefit for individuals who have invested in companies, allowing them to pay a tax rate of 10% on qualifying disposals. It is claimed as part of a personal tax submission for the period in which a capital distribution is received, and the following criteria must apply:
- The shareholder must own at least 5% of the shares;
- They must have been owned for at least one year prior to disposal (in this case liquidation);
- The assets must be distributed within three years of cessation.
Where Entrepreneurs’ Relief is not available, a UK individual will typically pay a rate of 20% on capital gains, so an MVL may still offer a substantial tax saving over taking dividend income.
You will require the services of an insolvency practitioner to assist with the liquidation of your company.
It is important to note that the liquidator acts for the company and will not be in a position to provide the director/shareholder with advice on their personal tax position.
Any specific queries regarding a director/shareholder’s personal tax position should be dealt with by a personal accountant or tax adviser.
Want to know more?
The MVL team at Brett’s is director lead and we usually are able to make an early distribution within 24 hours of being appointed (with the appropriate indemnities) and will keep the shareholders appraised of progress with regular updates.
The next step is to call us for a free, no-obligation discussion to see how we can help you…
Contact us: +44 (0)808 168 7540 | Email: firstname.lastname@example.org