MEMBERS VOLUNTARY LIQUIDATIONS QUICK REFERENCE GUIDE

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1 MEMBERS VOLUNTARY LIQUIDATIONS QUICK REFERENCE GUIDE

2 WHAT IS AN MVL? A Members Voluntary Liquidation (MVL) or solvent winding up is a statutory process which allows business owners to extract their hard earned gains from a company in a tax efficient manner. Typically it is done at the end of a company s life, when its trade has ceased or been sold on to another company. Whilst it is a liquidation (and therefore you need to use a licensed insolvency practitioner), because it is a solvent winding up none of the usual problems arise; All creditors are paid in full. There are no restrictions on directors going forward. There is no investigation or report sent to Department of Business Innovation and Skills. The process can be technically complicated but the outcome is straight-forward in that the liquidator will distribute the company s assets to shareholders and they should pay less tax as a result.

3 WHY WOULD I USE ONE? It can be more tax efficient than other methods. Any money distributed to the shareholders by a liquidator is treated as a capital distribution rather than income (like a dividend). This means you pay capital gains tax rates of 18% and 28% rather than income tax of as much as 45%. Better still if the company was trading and qualifies under the Government s Entrepreneurs Relief scheme then the 18% or 28% falls to 10%. This combined with an annual capital gains exemption (currently 11,000) can make it an attractive proposition. The procedure has become much more common since the government abolished a tax concession whereby, in certain circumstances, funds could be distributed as capital without a formal liquidation. Now this can only take place if reserves are less than 25,000.

4 WHAT ARE THE BENEFITS? Because of the need to use a licensed insolvency practitioner to complete the formalities of liquidation there are costs involved but these should be more than offset by the tax saved. The actual costs and benefits involved will vary depending on the circumstances but the example below gives an indication of the benefits. MVL Without MVL Distributable reserves 250, ,000 Dividends - (220,000) Costs (15,000) (5,000) Capital distribution 235,000 25,000 Assuming one shareholder (with 50K other income and no other gains) Dividend received - 220,000 Income tax due on dividend - (66,222) Capital gain 235,000 25,000 CGT due (after AE and ER) (22,400) (1,400) Net received 212, ,378 Tax saved 45,222 67%

5 HOW LONG DOES IT TAKE? The process will vary from case to case but the table below provides an indicative timescale. Action Send engagement letter and request information. Await return of paperwork and provision of information from client. Prepare paperwork for the meeting of shareholders, including Declaration of Solvency and requisite resolutions, minutes and indemnities. Meeting of shareholders. The company enters liquidation. Advertise the liquidation and place advert calling any creditors to claim. They should be given three months notice. Within this timeframe the final accounts (from the last year end to the day of liquidation) and corporation return can be prepared, submitted and filed (usually done by the existing accountant). Dividend declared and paid to shareholders. Final meeting of the liquidation called held and liquidator released. Timescale (sequential) Upon instruction. Dependent upon client. 1-2 weeks. Two weeks notice. This can be held at short notice, so it is a function of the availability of the shareholders. If required meetings can be held by correspondence but as the majority of the board need to swear the declaration of solvency (in front of a solicitor) it is often easier to have a physical meeting. Immediate. Three months. (Distributions can be made within this period under some circumstances). 1-2 weeks from end of notice. Dependent on HMRC clearance but generally before 12 months.

6 HOW CAN I MAXIMISE THE BENEFIT? Distribution of property in specie Normally we recommend that all the company s assets are converted to cash prior to liquidation and known liabilities settled to keep the liquidation costs to a minimum. However it is possible, in certain circumstances, to declare a dividend which comprises an actual asset rather than cash. For example, a company may own a property which the shareholder wishes to retain. As part of the liquidation the liquidator can declare a distribution of the property direct to the shareholders without it having to be sold. There are different tax implications for both methods and these will need to be assessed as part of the process. Maximise allowances Each shareholder gets an annual exemption of 11,000* in each tax year. Consequently, it is possible to make consecutive distributions either side of the tax year-end to use two years allowances, or for shareholdings to be split to maximise the benefit. Splitting companies Special legislation allows for businesses to be split in half and transferred to new entities without incurring a tax charge (subject to circumstances and tax clearance). This can help with wider tax planning (e.g. Inheritance Tax Planning) and management splits. Immediate access to funds In certain circumstances and on the provision of indemnities from the shareholders, some of the funds can be distributed to shareholders within a week of appointment of the liquidator so this can put money in the hands of the shareholders very quickly. *Correct at the time of going to print.

7 OUR EXPERTS Simon Rowe Insolvency Partner Management consultancy, business turnarounds and insolvency Tim Close Insolvency Partner Solvent and insolvent liquidations, administrations and business turnarounds Rachel Hotham Insolvency Manager Liquidations, corporate recovery, restructuring and business valuations BATH OFFICE BRISTOL OFFICE LONDON OFFICE TAUNTON OFFICE YEOVIL OFFICE 1 Queen Square, Bath, BA1 2HA One Redcliff Street, Bristol, BS1 6NP East Smithfield, London, E1W 1AW Winchester House, Deane Gate Avenue, Taunton, TA1 2UH Motivo House, Yeovil, BA20 2FG T: T: T: T: T: Disclaimer - for information of users: The information in this guide is intended for general advice only and no action should be taken in respect of individual circumstances without receiving specific advice. MGI is a worldwide alliance of independent auditing, accounting and consulting firms. Neither MGI nor any member firm accepts responsibility for the activities, work, opinions or services of any other members.

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