Solvent Liquidation Advice
A solvent liquidation (or “MVL”) is a cheap, tax efficient process, used to close down a solvent company (a company with enough assets to pay all of its debts) and to distribute its assets to its shareholders after all of the company’s creditors have been paid.
It is used as an alternative to striking off and is most widely used by construction companies who complete certain build contracts or companies whose trading has changed as an MVL allows you to close your company and take out your funds without paying the full capital gains tax (“CGT”) rates then continue to trade through new or other existing business providing its operation is not identical to the company closing down (as that would be considered tax avoidance).
Bridge Newland are MVL specialists who offer free solvent liquidation advice. Therefore do not hesitate to get in touch should you wish to establish whether you can save tax with this solvent close down process.
How is a Solvent Liquidation/MVL Tax Efficient?
Put simply, current legislation allows for all distributable reserves of up to £25,000 to be treated as capital and taxed under the CGT rules, whilst distributable reserves above this threshold must be treated as a dividend and will be taxed at the shareholder’s income tax rate, meaning the majority of company closures with more than £25,000 to distribute to shareholders are closed more tax efficiently through a solvent liquidation (MVL).
If your company is eligible for a solvent liquidation, you are likely to be entitled to claim entrepreneurs relief on your capital gain, reducing your CGT rate to 10% from the typical CGT rate of 10-18% , meaning the tax savings are often significant.
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.
Is my Company eligible for a Solvent Liquidation/MVL?
Typically an MVL is appropriate where there are funds, or surplus assets for distribution, of £25,000 or more, as the combined taxes and fees are less expensive in companies with fewer assets if done through a striking off.
There are however a number of restrictions regarding which businesses can use an MVL if there is to be a continuation of a similar type of business is planned (to the one which is being closed) by the officers going forward therefore specialist advice should be sought on these from a professional.
If you are unsure whether an MVL is right for your company, please give us a call, as our staff are licensed to handle solvent liquidations and are happy to help provide you with our expert MVL advice and support.
What is the Solvent Liquidation Process? / When Will I Get my Funds?
MVLs have become more widely used recently due to changes with ESC16 legislation as, in the past, the old legislation meant that most closures were more tax efficiently done outside of an MVL.
Since the changes have been brought in, MVLs are regularly recommended by IPs and accountants as a way for shareholders to increase their personal wealth, however quite rightly, many company shareholders have reservations about handing over their hard earned funds to an IP and wait to receive a distribution of them some time down the line. This can cause many shareholders to go with the simpler route of a strike off, even if it results in more tax being paid.
At Bridge Newland we appreciate that quick distributions are a priority for shareholders therefore we have worked closely with solicitors in order to produce an indemnity document which protects the liquidator from personal loss (should any creditors come out of the woodwork) this in turn, allows us to pay 90% of the shareholder’s funds immediately to the shareholders upon the indemnity being signed, and upon the Liquidator’s appointment. We then continue to work hard to receive tax clearances from HMRC and upon receipt of their confirmation of having been paid (clearances), the balancing 10% of shareholder funds are distributed to the shareholders less the costs and expenses of the process.
We pride ourselves in ensuring that company shareholders receive their funds as early as possible and therefore, unlike most insolvency practitioners, we do not hold onto shareholder funds for 21-35 days whilst potential creditors are given the opportunity to prove their debts.
Solvent Liquidations – What is the cost with Bridge Newland Limited?
Our typical fee for undertaking an MVL is £1,500 + VAT + disbursements, meaning that we are one of the cheapest around, however this increases slightly if the distributable balances are large, or if there are increased works to do such as assets to sell or creditors to pay.
If you would like to speak with our Licensed Insolvency Practitioner regarding our specialist solvent liquidation services, please contact our free phone number on 0800 612 6197. All initial advice is free of charge.
Do you require insolvent liquidation advice instead? – If you require specialist liquidation advice for an insolvent company then go to our Creditors Voluntary Liquidation page or fill out our contact us page by clicking the enquire now button above.
However, for our detailed free guide to MVLs and the solvent liquidation process generally, see below:-
FREE Solvent Liquidations / MVL Advice Guide
What is an MVL?
An MVL is the process by which a solvent company is wound up and dissolved. It enables shareholders to exit the business and withdraw any capital within it or arrange for assets within the company to be transferred into their personal estates.
When is an MVL appropriate?
Generally, an MVL is appropriate where the company has, for whatever reason, reached the end of its purposeful life and there are realisable assets or cash sufficient to pay all creditors within a specified period together with statutory interest. This includes the costs of the liquidation, although it is common for these costs to be paid by the shareholders or a parent or group entity. The surplus assets are distributed to shareholders, either in cash or in specie.
Common scenarios include where shareholders wish to retire; where the owners of a family business wish to retire and their children have no interest in continuing the business; where there has been a deterioration in the relationship between stakeholders and there is a need to wind up the business equitably; and where the passing of time or changes in the market or legislation have led to the business no longer being viable. The MVL process can also be used effectively in group restructuring.
What are the advantages of an MVL and what is the alternative?
The alternative to MVL is simply to apply for the company to be struck off and dissolved. Historically, by applying for an extra statutory concession from HMRC, directors were able to effectively wind up a company and distribute its surplus assets to shareholders without the need for a liquidator. Such distributions were tax advantageous for shareholders as the distributions were taxed as capital gains rather than income.
More recently, the extra statutory concession has been enacted into law and a limit of £25,000 has been imposed on the total amount that can be distributed and treated as capital, rather than income, for tax purposes. However, the legislation provides that once the £25,000 limit is reached, all distributions will be treated as dividends (i.e. not only distributions over and above the £25,000 cap). Placing the company into MVL ensures that all distributions can be treated as capital without limit.
There are further advantages of an MVL in comparison with an application to strike off, these are:-
- If creditors have not made a claim against the company for anything they may be owed whilst the Liquidator was in office, they may not (with very few rare exceptions) later apply to have the company restored to the register in order to pursue legal action against it. Any application to restore the company must be made within 2 years of its dissolution, whereas an application may be made at any time within 20 years of dissolution in the case of strike off without liquidation.
- An application to strike off can only be made if the company has not, in the previous three months, traded or carried on business, changed its name, or sold business assets, rights or property. An MVL can be instituted immediately on cessation of trade and is the most efficient way to wind up the affairs of a solvent entity.
- Finally, in a liquidation (and once creditors have been paid) there are no restrictions on distributing funds to shareholders, including distributions of capital & reserves, which are usually prohibited as unlawful dividends outside of liquidation.
How does the process work?
Once it is decided that an MVL is appropriate, the directors call an extraordinary meeting of shareholders to consider a resolution to wind up the company and to appoint a liquidator. The shareholders can appoint a Liquidator of their own choosing if they disagree with the directors’ selection. Prior to the meeting, the directors must swear a statutory declaration of solvency before a solicitor or commissioner for oaths. The declaration embodies a statement of assets and liabilities, and states that having made a full enquiry into the company’s affairs, the directors are of the opinion that the company is capable of paying all of its debts, including statutory interest, within a specified period not exceeding 12 months from the date of the commencement of the liquidation.
The resolution to wind up the company is advertised in the Gazette 14 days, and filed with the Registrar of Companies within 15 days. It is normal practice to advertise for creditor claims, although these may well be settled prior to the liquidation commencing.
Once the Liquidator is in office, he must then take steps to deal with any outstanding matters such as realising the company’s assets (which may be as straightforward as cash at bank, or may be in the form of tangible or intangible assets or property) and distribute the surplus to the shareholders once all the company’s liabilities, costs and taxes are paid. Assets may be distributed in cash or (commonly in the case of property) in specie.
There is no requirement for the Liquidator to conduct an investigation into the company’s affairs or the conduct of the directors, as is the case in an insolvent liquidation, as the directors have sworn a statutory declaration of solvency.
Once all claims are quantified and settled, if not already done so by the Company, the liquidator will distribute the surplus assets (either in cash or in specie) to the shareholders.
Once the company’s affairs are finalised and no assets remain, the liquidator will call a final meeting of members and lay before it an account of the winding up. The meeting will be advertised in the Gazette one month beforehand. Within one week of the final meeting, a return of the meeting and final account will be filed with the Registrar of Companies, and after three months, the company will be struck from the register and dissolved.
The Steps to be taken prior to liquidation…
There are tax implications of distributing surplus assets to shareholders, and careful consideration must be given to the potential tax issues before entering into MVL. Alternative options are available to extract surplus assets from solvent companies, all of which have their benefits and disadvantages, and the insolvency practitioner will work closely with the directors and the company’s accountants and tax advisers to ensure that MVL is the most tax-advantageous solution before proceeding.
In practice, and in order to minimise the costs of the liquidation as far as possible, we would suggest that the following be completed prior to the commencement of the liquidation:
- If assets – obtain valuations and sell assets at market value
- Offset mutual trade debtor/creditor accounts and pay trade creditors any monies due
- Dismiss employees and pay all monies due
- Submit all pre-liquidation VAT, corporation tax and PAYE returns and pay any monies due
- Recover trade debtor monies and ensure any disputes are settled
- Ensure all books and records, including statutory books, are up to date
- Prepare management accounts to cessation of trade and terminate any leasing or hire purchase agreements and settle accounts
This list is not exhaustive and will be tailored to the circumstances of each case.