Solvent Liquidations with Tax Benefits

When shareholders receive a dividend (whilst the company is trading) it will be classed as income and taxed accordingly.  If a company has come to the end of its useful life and is solvent, it is better for the shareholders if they close the company and receive the funds as a capital distribution. 

If the funds are less than £25,000, upon strike-off they will automatically be taxed on the shareholder as a capital gain – currently 20%. However, if the funds are above £25,000, the whole amount will be taxed as dividends (rates will depend on your income amounts and the tax rates attached to this).

The relevant legislation can be found here.

If funds to distribute are in excess of this, the most appropriate way of doing this is by a Members Voluntary Liquidation (‘MVL’) as the £25,000 limit will not apply and distributions will be treated as a capital receipt.

Shareholders receiving this distribution may qualify for business asset disposal relief (formerly known as entrepreneur’s relief).  This will allow them to benefit from a tax rate which is currently at 10% (for capital distributions up to up to £1m I their lifetime).  These can amount to some significant taxation savings.

An MVL is the most straightforward of all liquidations, involving the members passing resolutions to appoint a liquidator, the liquidator realising the assets and discharging any liabilities and finally distributing the funds to the shareholders.  The liquidators may also make more than one distribution to shareholders if it is beneficial to shareholders to receive these in certain tax years.

The costs of an MVL will vary company by company.  In most cases, the savings in tax will more than compensate the costs of an MVL. 

If you need help or advice, contact us on 01302 965485 or request a callback using the form on this page and we’ll get back to you.