Tax Considerations of a Members’ Voluntary Liquidation (MVL)

If you intend to wind up your solvent company by placing it in members’ voluntary liquidation, you stand to benefit from the disposal of its cash reserves and assets.

Naturally, HMRC will need to be informed about any money you receive during the MVL process.

You’ll therefore want to familiarise yourself with members’ voluntary liquidation tax implications, considerations and advantages.

There are several significant members’ voluntary liquidation tax benefits for directors and other shareholders.

We’ll outline them in this article, which is designed to be a director’s guide to MVL tax.

In a nutshell, MVLs are outstandingly tax-efficient ways of liquidating profitable companies that are no longer required (due to their owners retiring or changing careers, for example).

This is primarily because with members’ voluntary liquidation capital gains tax is paid, not income tax (which is often charged at a steeper rate), meaning you enjoy a greater financial reward for the time and effort you’ve invested in your business.

As experienced UK insolvency practitioners, we’re often appointed as liquidators by companies entering members’ voluntary liquidation.

You can be confident we have the expertise required to help you understand what members’ voluntary liquidation tax means for you, as well as the beneficial effect an MVL may have on your tax position.

Read on for general information and advice about members’ voluntary liquidation tax implications or call Irwin Insolvency now on 0800 254 5122 to discuss your firm’s circumstances.

What are the tax implications of an MVL?

Members’ voluntary liquidation tax implications tend to be overwhelmingly positive, especially for businesses that have considerable sums to distribute among shareholders following the solvent liquidation procedure.

That’s because arranging an MVL is the only way to ensure all proceeds (i.e. the funds remaining after debts, fees and expenses have been paid) are taxed as capital gains rather than income in the form of dividends, even if they exceed the usual limit of £25,000 for capital distributions.

When you consider how much lower capital gains tax rates are than the two highest income tax rates, you realise that MVL tax savings can be substantial:

• Members’ voluntary liquidation capital gains tax is charged at 10 per cent for basic-rate taxpayers and 20 per cent for higher-rate taxpayers on sums exceeding the annual tax-free allowance of £3,000. The government’s Business Asset Disposal Relief (BADR) initiative enables shareholders to halve the top capital gains tax rate when a company is in MVL.
• By contrast, income tax rates start at 20 per cent (for basic-rate taxpayers) and climb to 40 and 45 per cent (for higher-rate and additional-rate taxpayers, respectively). Plus, the annual tax-free allowance of £12,570 isn’t available to individuals earning over £125,140, as Which? magazine explains.

What’s more, members’ voluntary liquidations are a compelling alternative to voluntary strike-offs for companies with over £25,000 to distribute, as the latter option doesn’t offer the same tax benefits.

The members’ voluntary liquidation tax landscape is certainly attractive.

Directors just need to ensure they arrange an MVL for the right reasons in order to avoid falling foul of the law. In other words, your primary motivation for placing your company in members’ voluntary liquidation must be to move on with your life, not to avoid paying income tax.

When considering members’ voluntary liquidation tax implications, it’s important to be aware that HMRC can investigate directors who close down solvent firms, extract funds as capital gains then set up similar companies shortly afterwards, as such behaviour could constitute tax avoidance.

Tax advantages of a Members’ Voluntary Liquidation (MVL)

We’ve already touched on members’ voluntary liquidation tax advantages, but now we’ll bring them into focus.

• Because MVL distributions are always classed as capital, not income, you’ll pay less tax
• Solvent companies can therefore pass on as much value as possible to shareholders. There’s no need to fear members’ voluntary liquidation tax implications even if your business has vast cash reserves and numerous valuable assets
• Further tax savings are possible with BADR, which is available to shareholders who’ve held at least a five per cent stake in the company for the past two years. BADR means you’ll pay just 10 per cent members’ voluntary liquidation capital gains tax on up to £1 million.
• Although MVLs incur liquidators’ fees, tax savings often considerably outweigh those costs.

MVL tax advice from our liquidation experts

As experts in liquidation and members’ voluntary liquidation capital gains tax, our licensed insolvency practitioners can successfully manage your profitable company’s MVL from beginning to end.

We’ll ensure the business is wound up lawfully and smoothly and that shareholders benefit from members’ voluntary liquidation tax savings.

For tailored advice about members’ voluntary liquidation tax implications or to arrange an MVL, contact Irwin Insolvency today.