A tax-efficient tool for shareholders
Do you know about MVLs?
Members Voluntary Liquidation (“MVL”) can often represent the most tax efficient process of enabling solvent companies to pay a return of capital to its Shareholders and this may certainly be the case if the assets of the Company are greater than £25,000.
Historically dissolving a company and paying a distribution of the company funds to shareholders would have been treated as an unlawful distribution. However it was not considered cost effective to take action to recover the amount distributed unless there was more than £4,000 of Share Capital. Therefore assets owned by the company immediately at dissolution would have been recovered by the Crown and claimed by the Treasury Solicitor’s Office as bona vacantia, (which literally translates to vacant goods). This provision was withdrawn from 14 October 2011.
Tax effective way to wind down a business
With the current legislation if you are going to dissolve your company and pay a distribution in anticipation of its dissolution, providing the amount of the distribution does not exceed £25,000 then the distribution will not be classed as dividends subject to Income Tax, but rather as capital distributions subject to Capital Gains Tax. This would enable shareholders to pass the funds to themselves without the need for a Liquidation. Be careful though as there are some caveats so it is always recommended that you seek advice from an Insolvency Practitioner or your accountant, especially if you have recently paid any dividends!
Without a liquidation, if the funds prior to the Company being dissolved are in excess of £25,000 then the distribution will be treated as “income” and subject to Income Tax, and this most importantly, this will be for the whole amount and not just those funds in excess of £25,000! Therefore for shareholders who are higher-rate taxpayers it would be advantageous from a taxation point of view to place the Company in Members Voluntary Liquidation whereby all distributions are treated as “capital” and therefore subject to Capital Gains Tax.
Need more help?
For more information or assistance on MVLs and how these can work for you contact Alison on 01795 433655 or visit our Resources area on our website for more information on the Insolvency Team and how they could help you.