Members Voluntary Liquidation Advice
With various options available for closing down a solvent company at the end of its useful life, how do you know which one is the right one? It comes down to money and taxes.
Traditionally, the route to closing down a solvent company is to distribute the available cash to shareholders and apply for the company to be struck from the register. Two options are available: distribute the funds as capital (and pay capital gains tax on the distribution), or distribute the funds as dividends (and pay income tax). Unfortunately, the enactment of s1030 CTA 2010 (and the abolition of ESC C16) prevents the treatment of distributions exceeding £25,000 as capital, with the result that business owners with reserves exceeding £25,000 have no option but to distribute the funds as dividends, and pay the resulting income tax at the dividend rate.
In the vast majority of cases, paying CGT is favourable to paying income tax, particularly when the shareholder is entitled to benefit from the 10% CGT rate on claiming Entrepreneurs’ Relief (“ER”). Thus, companies with cash reserves of more than £25,000 and wishing to take advantage of the lower tax rates for capital distributions must place the company into members’ voluntary liquidation, which permits distributions of capital without limit. The costs of the liquidation, which are usually met from the company’s cash reserves prior to distribution, are dwarfed by the savings available from a CGT rate of just 10%.
However as of 6th April 2016 a new Targeted Anti-Avoidance Rule (TAAR) must be applied to certain distributions from a winding up. TAAR will now only treat a distribution from a winding up as if it were an income distribution where:-
- An individual who is a shareholder in a close company receives from the company a distribution in respect of shares in a winding up:
- Within a period of two years after the winding up, the person carries on a similar trade or activity, and
- The arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.
Members Voluntary Liquidation Case Study
Looking at a worked example, the benefits of members’ voluntary liquidation are clear:
Mr Smith is the 100% shareholder of a company, having subscribed for the entire share capital of 100 £1 ordinary shares on incorporation. With the intention of retiring from work, Mr Smith recently sold the business to a third party, paid the remaining trade creditors and settled the company’s outstanding tax liabilities. Mr Smith considers his options for releasing the £400,000 cash in company’s bank account.
If the funds were distributed as dividends, Mr Smith would pay income tax at the higher dividend rate, resulting in a tax bill of over £100,000. If the company were placed into members’ voluntary liquidation, however, the available funds (after meeting the costs of the liquidation) would be paid to Mr Smith as a capital distribution, attracting capital gains tax at the ER rate of 10%, the distribution would look like this:-
|Less paid up capital||(100)|
|Less annual exemption from CGT||(11,000)|
|ER CGT at 10%||38,890|
Mr Smith saves in excess of £60,000 in tax by placing the company into MVL. Whilst the above example does not take the costs and expenses of the members’ voluntary liquidation into account, these costs are usually as low as £1,500 + VAT + Disbursements and even in the largest of cases, rarely exceed £10,000 + VAT + Disbursements.
As ER is available on lifetime gains of up to £10m from 6 April 2008, and with the main CGT rate currently at 18%, the potential lifetime tax savings for an individual can be up to £1.8m.
Members Voluntary Liquidation – A Cheap Closure Solution
Although members’ voluntary liquidation is only available to solvent companies, the process must be handled by a licensed insolvency practitioner. With rates starting from as low as £1,500 plus VAT and disbursements, Bridge Newland can advise you on the most appropriate and tax efficient way to close down your successful company.
For full details on Members Voluntary Liquidations and for free guides and videos, see our main page HERE
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