Members’ Voluntary Liquidation: what directors need to consider

December 1, 2021

A Members’ Voluntary Liquidation (MVL) is a formal process to bring solvent companies to a close.

As directors continue to reflect on the prospects for their companies in light of the present pressures on businesses, we have seen increased demand for MVLs in the past few months. This is largely Covid19 related, but there are a variety of other underlying reasons such as uncertain future asset values, cash flow concerns, ongoing supply chain problems, withdrawal of Government support, increasing costs due to a rise in inflation, general trading uncertainty and IR35 considerations.

Directors are also taking the opportunity to benefit from Business Asset Disposal Relief (formerly Entrepreneur’s Relief) now, in the knowledge that it has attracted criticism over the years and will undoubtedly be coming under increased scrutiny as the Government seeks to clawback revenue.

With these different factors in play, we look at the process, considerations and benefits of Members’ Voluntary Liquidation for company directors.

Why a company would enter Members’ Voluntary Liquidation

The typical reasons why a company would enter a MLV include:

  • Retirement and sale of company assets to extract value
  • No succession for the business
  • The company no longer has a purpose (perhaps resulting from changes to IR35)
  • Shareholder dispute
  • Restructuring of company assets
  • Covid19 related implications

MVLs attract favourable tax treatment on distribution of capital compared with taking dividends. For shareholders, where distributable funds exceed £25,000, the tax benefits only flow if the company enters a formal Members’ Voluntary Liquidation.

Funds are classed as capital receipts and subject to Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief before 6 April 2020). Business Asset Disposal Relief can be claimed on capital gains on qualifying shares. This is a personal tax relief which attracts a tax rate of only 10% on distributions up to a lifetime limit, now £1m, reduced from £10m by the 2020 Budget. Now only the first £1m will be taxable at 10 percent, with the remainder subject to capital gains tax at the prevailing main rate.

We recommend that you speak to your accountant/tax advisor before entering into an MVL. You should also consider the use of annual exemption for Capital Gains tax (where there are two or more shareholders), which can give a further benefit.

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 at

What are the pre MVL considerations?

There are specific actions directors need to take before applying for MVL:

  • Cease company trading
  • Sell off any remaining fixed assets/stock
  • Prepare accounts, corporation tax and VAT returns up to the date of cessation of trade
  • Collect in any debts owed to the company
  • Settle all company liabilities, including tax

We typically recommend that all final returns be sent to HMRC before the start of the process. This is because the liquidator will need clearance from HMRC before the final paperwork can be filed at Companies House. Clearance from the bank is also needed which can hold up the distribution of the assets. One way to avoid this delay would be to transfer the funds to the liquidator’s client account.

While the process can be completed relatively quickly with the assistance of a licensed Insolvency Practitioner, it does require all matters to be attended to first and therefore proper planning is essential if an early withdrawal of cash is required.

Some tax considerations

  • Remember that the £1m lifetime limit for the 10% CGT rate is per shareholder. A five-shareholder family company enjoys a £5m lifetime limit, all things being equal.
  • There is now targeted anti-avoidance legislation linked to the use of the MVL process to release funds at the 10% CGT rate instead of as income dividends subject income tax at higher rates. We recommend that you take specialist tax advice to make sure that you do not fall foul of these rules. Please bear in mind that if you are planning to retire from business, this rule is unlikely to affect you.

What are the conditions and benefits of a Members’ Voluntary Liquidation?

  • It enables an orderly wind-down of assets and affairs of a solvent company
  • It can give rise to significant tax advantages
  • It can provide greater protection for directors and shareholders
  • The process can be completed quickly with proper planning and timing, subject to clearance from HMRC
  • As a general guide, an MVL is a better alternative to a Striking Off at Companies House, if assets exceed £25k and the Directors are higher rate taxpayers
  • It can only be conducted by a Licensed Insolvency Practitioner
  • All debts must be capable of being paid in full, including HMRC

A MVL can be an effective and controlled way for directors to bring their company to a close. It can also provide greater protection for directors and shareholders than a dissolution application made without following a liquidation procedure. As such, provided a company meets the specific criteria involved, a MVL could prove the best route forward for directors, both for security and tax advantage.

For more information on Members’ Voluntary Liquidation, we offer an initial free consultation to review the situation and make recommendations on the best way forward. If we think that an MVL is the best option for you, our specialists can support you at every step of the way through the process. If you would like to discuss this further, please contact one of our Partners at your nearest office.

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For more information on business options, we offer an initial free consultation to review the situation and make recommendations on the best way forward.

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