If you are a shareholder with more than £25,000 in a company and it has come to the end of its economic life, a Members’ Voluntary Liquidation (MVL) is a neat way of extracting the funds and ending the company’s filing requirements. From a tax point of view, the extraction of funds are subject to Capital Gains Tax (CGT) rather than a higher rate of income tax. The amount of distribution subject to CGT is reduced by an individual’s annual allowance of £3,000.
Many shareholders qualify for Business Asset Disposal Relief. With this relief, individuals currently pay just pay 10% tax on their gains, however, from 6 April 2025 the rate of tax will increase from 10% to 14%, and then to 18% from 6 April 2026.
In a nutshell, if your company has come to the end of its useful life you need to act quickly to take advantage of the current lower tax rates.
How to prepare yourself for the MVL of your company
Simplify the balance sheet
A company may have assets and debtors in the balance sheet. To keep the time spent by the liquidator on the MVL to a minimum, it makes sense to sell the assets and collect the debts pre-liquidation so there is only cash at bank left. There may be a property in the company that could be distributed in specie – rather than selling it and distributing the proceeds - to the shareholders by the liquidator. It is good to have early conversations between all the shareholders to ensure that this is what everyone wants. If there is a post-liquidation dispute, the liquidator may end up having to sell the property and distributing the proceeds instead, which is a time-consuming and costly operation.
Continuing on the subject of properties, if a property is distributed in specie and has a commercial mortgage on it, stamp duty would be payable. Shareholders may consider paying off the mortgage with company or shareholder monies to ensure that no stamp duty would be payable at the time of the distribution. If this is not possible, it may make economic sense to sell the property pre-liquidation to save on liquidation fees.
Know your company
It is critical that all liabilities, even contingent liabilities are identified pre-liquidation. This will allow the liquidator to calculate the amount that can be distributed to shareholders, even if this has to be done in stages. In the worst case scenario, an additional liability could tip the company into insolvency, and the MVL will have to be converted to a Creditors’ Voluntary Liquidation. Alternatively, it may mean that shareholders have to pay back some of their distributions, again a costly exercise.
Get ahead with the company’s tax liability
When liquidators are appointed, the company will need to file a corporation tax return for the period ending on the day before the liquidators’ appointment. Ideally, all pre-appointment tax liabilities should be calculated prior to the liquidation and the resulting tax paid (even if not yet due). Statutory interest at 8% per annum on all outstanding tax from the date of liquidation, irrespective of the normal due date for payment, will also be applied, so it pays to have all your company accounting and tax returns in order to avoid this additional expense.
Be ready for a speedy distribution
It is always advisable to extract the company’s cash at bank pre-liquidation to allow a speedy distribution to shareholders. If this is not done, on the appointment of liquidators the company’s bank will, as a matter of course, freeze the company bank account. It often takes a few months for the release of funds, causing a delay to the distribution.
Be sure what services potential liquidators are quoting for
A members’ voluntary liquidation is more than just a form filling exercise. As can be seen from the above, complications and delays can arise, so it is advisable to discuss these matters before you engage a firm of insolvency practitioners. For example, will the submission of VAT returns and reclaim of VAT be included in the price? Are you happy that your liquidators will be available to communicate effectively during the MVL process and be transparent in the duties they will undertake?
Preparation saves time and money
As shareholders, time spent pre-liquidation in preparation for the appointment of the liquidators is time well spent and will save you time and money in the long run. Engaging a firm of insolvency practitioners who are experienced in undertaking MVLs will mean they are aware of the pitfalls that can arise and how to avoid these problems.
For more information about a members’ voluntary liquidation, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk
