A Members´ Voluntary Liquidation (MVL) is the formal process entered into to wind up the affairs of a solvent company and distribute the assets to the shareholders as capital rather than income, therefore incurring preferential personal tax rates.
Now, this can be a very useful route to take if you´re sure that it will save you lots of tax! But sometimes, in certain circumstances, it can actually end up costing you more in tax. So what do you need to be aware of if you´re considering an MVL for your limited company? How do you know it´s the right option for you? And what can make it cost more?
Things to be aware of with an MVL
The great thing about limited companies is that you can build up sufficient cash within the business and then liquidate it, if you no longer require the company’s use. When all the cash from the company is paid out, tax is then paid at the Business Asset Disposal Relief tax rates (formerly called the Entrepreneurs Rate Relief). So, for example, the first £1m is only taxed at 10%!
This is fantastic in itself, as if this money was taxed as a dividend distribution, then you could pay up to 39.35% tax. And let´s be honest, nobody would want to pay almost 40% tax versus saving nearly 75% on their tax bill!
BUT…and it´s a big one. Before you start thinking that this is too good to be true, it´s because it could be. There is a clause in this process. A clause called Targeted Anti-avoidance Rule (TAR), and its purpose is to prevent entrepreneurs from liquidating one company only to set up another. Obviously, the taxman would rather not have you turning what could be a 40% income into a 10% capital gain! So what does this mean?
Well, this clause or rule states that if you trigger any of the anti-avoidance criteria below, you can still enter into an MVL and be paid the money, but you will only receive dividend tax rates rather than capital tax.
For example, if:
- You are at least a 5% shareholder – and for capital gains tax purposes, owned them for two years as an employee or director.
- The company was a close company – usually owned by five or fewer people.
- You continue to carry on (or be involved with) the same or similar trade – within two years of the payment date.
- HMRC suspects misuse – usually that the main purpose of the winding up is to pay capital gains tax instead of income tax.
This “Condition C” to use the taxman´s jargon, has been quite widely drafted to try to stop anyone from getting their money out at 10% only to start another limited company straight away and do it all again. And this includes if you continue to be directly or indirectly involved with the same or similar trade or activity as the company being wound up (at any time within two years from the date of distribution).
“What do they mean by indirectly?” I hear you say.
Well, if a connected person starts a new company and then they employ you, this would trigger the anti-avoidance rule as you are connected to each other and you´re indirectly involved in their business (which is similar or the same as the one you just liquidated). “Connected person,” just for reference, would be anyone considered an immediate connection, such as your spouse or partner, your parent or your spouse´s parent, your sibling or your spouse´s sibling, or your child or your spouse´s child. Essentially, any immediate relative, rather than relatives such as nephews, nieces, aunts or uncles.
So be aware of TAR! If this is what you are thinking of doing, then an MVL is probably not the right choice for you. It won´t save you any tax, and you´ll get into a lot of trouble!
Is an MVL right for you?
If you meet any of the below criteria, an MVL is the right choice for you.
- You´re a business owner who wishes to retire but doesn´t have anybody to pass the company over to.
- You´re a business owner who wants to start a new venture.
- The company may have fulfilled its purpose or completed a contract.
- The company may be redundant or unnecessary due to external changes.
However, if an MVL isn´t, have you thought about other options? If so, which ones have you thought of? Do they get you the same kind of benefits?
Which strategies and tax reliefs you can get often depend on your circumstances, so before you dive into a certain process, don´t forget to consult a professional! Accountants like us can really help you make the best decision for you and your company, whether it´s an MVL or an alternative approach. We can help you evaluate the benefits, risks, and costs, so you can be confident in your decision.
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