Members Voluntary Liquidation – 7 steps to a tax efficient company closure

If you decide to wind up a profitable, trading business for whatever reason – maybe you’re retiring, maybe you want to move into a new industry – a Members Voluntary Liquidation (MVL) is usually the best way to maximise how…

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Members Voluntary Liquidation – 7 steps to a tax efficient company closure

If you decide to wind up a profitable, trading business for whatever reason – maybe you’re retiring, maybe you want to move into a new industry – a Members Voluntary Liquidation (MVL) is usually the best way to maximise how much cash you can take with you out of the business.

Benefit 1: Tax savings

Firstly, an MVL is tax-efficient – closing your company in this way means all retained profits are treated as capital rather than income.

The funds distributed to shareholders are subject to Capital Gains Tax (CGT) rather than income tax, representing a considerably more favourable option than taking these funds as dividends.

The maximum capital gains tax rate is 20%, compared to the maximum income tax rate of 45%, demonstrating the potential to hold on to more of your money from the business.

Benefit 2: Entrepreneur’s relief

This is a tax relief scheme designed to reduce the rate of tax you are liable for. If you qualify for Entrepreneurs relief, you will pay a flat CGT rate of 10% on qualifying gains up to a lifetime limit of £10 million.

Eligibility for entrepreneur’s relief:

• Owned the business for at least 2 years before the date you sell/close it
• An employee or office holder of the company
• The company’s main activities are not investments
• Hold at least 5% shares (entitled to 5%+ of the profits/assets if the company is wound up, OR 5%+ of the proceeds if the company is sold)

 

Members Voluntary Liquidation – 7 steps to a tax efficient company closure JT Maxwell

So, what’s involved in an MVL?

1. ‘Clean up’ the balance sheet

Directors should dispose of easily realisable assets and pay liabilities – in other words, pay as many of your debts and turn as many assets you don’t wish to keep into cash; this helps make the liquidation quicker and reduces costs.

2. Declaration of Solvency

This important document differentiates the MVL from an insolvent liquidation – you’re winding up the business because you want to, not because you can’t/won’t be able to pay your debts.

The Directors (or a majority of them at least) make a statutory declaration that the company will be able to pay its debts in full, including interest and tax.

The declaration incorporates an up to date statement of the company’s assets and liabilities and must be made before the members pass the resolutions to wind up.

3. Members’ resolutions

This can be done via a general company meeting, or by asking members to consider written resolutions. When the resolutions have been passed, the documents commencing the liquidation are sent to the liquidator for advertising and filing.

Members Voluntary Liquidation – 7 steps to a tax efficient company closure JT Maxwell

4. Liquidator’s responsibilities

The liquidator is responsible for placing a notice to creditors in the London Gazette to send in their claims. When it has been decided that a payment will be made to creditors, the liquidator will give 21 days’ notice to those creditors that have not claimed to afford them a final opportunity to prove their debt.

5. Tax issues

The Liquidator will seek clearance from HM Revenue & Customs once the company is in liquidation and all matters have been dealt with i.e. creditors repaid. This will require the submission of all tax returns to the date of liquidation.

This process can take several months and will take longer if the company’s pre-liquidation tax affairs are not in order – this is why it makes sense to get the books ship-shape before you get to Step 2!
Returns will have to be submitted for the post liquidation period if the liquidator has received any taxable income or realised any capital gains.

6. Distribution to members

Only when tax clearance has been received and all other possible claims are paid and agreed will the liquidator be in a position to make a distribution of the surplus assets to the members.
On straightforward MVLs, distributions usually take place 3-4 months from point of liquidation. The liquidator may require an indemnity from the members as protection should a claim be received subsequently from a creditor for which there are insufficient funds available.

7. Closure

When all matters have been resolved and the necessary clearances have been obtained from HM Revenue & Customs, the liquidator sends to members the proposed final account on the liquidation.

 

If you, your client or someone you know is interested in a Members’ Voluntary Liquidation and could use some friendly guidance, give us a call today on 0800 0465 029, or drop us a line to info@jtmaxwell.co.uk

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