Directors – when is a Member’s Voluntary Liquidation suitable for you?

Directors – when is a Member’s Voluntary Liquidation suitable for you?

Chancellor Rachel Reeves said recently she will have to make “difficult decisions” on tax and spending in her first fiscal statement on 30^th October. We have already witnessed the early budgetary cuts to the Winter Fuel Payment. Unsurprisingly, we sense a general direction of travel.

Although changes to income tax, VAT, and national insurance were ruled out in the pre- and post-election rhetoric; experts say measures could include adjustments to capital gains and/or inheritance taxes. If that is the case then our concern for business owners is that Capital Gains Tax rates, and/or Business Asset Disposal Relief might come under the spotlight once again; with the Chancellor deeming this to be overly generous, thereby diluting it, or at worst withdrawing it altogether.

The tax impact for those people wishing to wind up their company is all too clear. As Insolvency Practitioners we anticipate the uncertainty could influence company owners to take action sooner rather than later.

What is the best route to close a business?

If you are considering closing your business, a Members’ Voluntary Liquidation is a formal process to bring solvent companies to a close and to distribute funds to the shareholders. All creditors including HMRC must be paid in full.

Typical reasons why a company would enter a Members’ Voluntary Liquidation:

• Retirement and sale of company assets to extract value
• No succession for the business
• The company no longer has a purpose
• Shareholder dispute
• Restructuring of company assets

The main benefit is the favourable tax treatment on distribution of capital compared with taking dividends. Where distributable funds exceed £25,000, the tax benefits will only flow if the company enters a formal Members’ Voluntary Liquidation.

Funds are classed as capital receipts and subject to Business Asset Disposal Relief which can be claimed on capital gains on qualifying shares. This is a personal tax relief which will attract a tax rate of only 10% on distributions up to a lifetime limit of £10m.

By not entering an MVL you will be paying income tax rather than the lower Capital Gains tax rate. Certain criteria apply and these can be found here.

Key points to note:

• An MVL is a procedure to bring solvent companies to an end, where distributable reserves exceed £25,000.
• All debts must be capable of being paid in full.
• The tax benefits and savings easily far exceed the Liquidator’s fees and expenses.
• The process can be completed quickly.
• MVL is a more flexible alternative to Striking Off, with greater protection for stakeholders.

We strongly recommend that professional tax advice is sought prior to entering into an MVL.