Posted by amandaireland - August 5, 2022 9:40 am Tax efficient tool for shareholders

What do you know about MVLs?

Members Voluntary Liquidations (“MVL’s”) are generally the most tax efficient way of enabling solvent companies to pay a return of capital to their shareholders, and it is almost certainly the case if the assets of the Company exceed £25,000.

Historically, dissolving a company and paying a distribution of the company’s 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 preceding dissolution would have been recovered by the Crown and claimed via the Treasury Solicitor’s Office as bona vacantia, (which literally translates to vacant goods), but this provision was withdrawn with effect from 14 October 2011.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 preceding dissolution exceed £25,000 then the distribution will be treated by HMRC as “income” and subject to Income Tax, and most importantly, this will be for the whole amount distributed and not just those funds in excess of £25,000! Therefore it is generally more advantageous from a taxation point of view to place the Company into Members Voluntary Liquidation whereby all distributions are treated as “capital” and therefore subject to Capital Gains Tax.

Business Assets Disposal Relief

When distributing the assets of the company via a solvent or Members’ Voluntary Liquidation, the shareholders may be entitled to Business Asset Disposal Relief on the distribution (subject to certain conditions and limits) thereby reducing their tax liability even further, and at the time of writing to just 10%.  

Need more help?

For more information or assistance on MVL’s and how these can work for you, visit the Glossary area on our website or by phone to 01795 433655.