MVL Liquidations for Companies in the UK

Members’ Voluntary Liquidation – Other Options?

Quite often owner managed companies build up a “war chest” due to a combination of:

-          Setting money aside for a rainy day (ie possible downturn in business)
-          Personal tax reasons (ie you’ve restricted your drawings to fall within a certain personal tax bracket, even though  there was sufficient retained profit to pay more).

 

Choices – When your company comes to the end of its life, there are a few different things you can do with this cash.  The main choices you have are:

  1. Stick a load of it in a pension pot.
  2. Take a huge dividend before closing the company.
  3. Keep the company open, taking dividends spread over multiple tax years until the chest is empty.
  4. Take the cash out upon closure of the company, either by strike off or members voluntary liquidation.

The  best option for you will depend upon your goals and personal situation, but a few of the pros and cons of each are:

 

Pension contribution:

There are annual and lifetime caps on what can be contributed.  Also the amount paid will typically be a valid business expense, therefore can be offset against company income to reduce the corporation tax liability.  For both of these reasons, pension contributions tend to make sense if they’re spread over quite a few years, so are worth planning some while before you cease trading.  If you’re at the stage where you’re stopping now and have lots of cash, putting it all in a pension pot now probably isn’t a good idea.

Also, obviously you can’t access the cash until you’re retired…so no good if you want the money now.

 

Large one off dividend:

This will be taxed as any other dividend.  If it’s the accumulation of many years profit, this could be a sizeable amount.  This will likely at the very least put you into the higher rate tax bracket, quite possibly also the bracket where you lose your personal allowance, or the additional rate tax bracket above that.  In short, it could lead to a massive personal tax bill.

 

Dividends over a prolonged period:

Some business owners like the idea of this.  It’s almost a homemade annuity.  You leave the company open, though it no longer trades.  Each year you draw a dividend which can be tax efficient based upon your other earnings in that tax year.

A few downsides of this:

-          You can’t get all the cash now, just a small proportion of it.
-          If you have other continuing personal income (eg perhaps a PAYE role, or a pension) then you may well already have used up much of your basic rate band, eliminating the tax efficiency of this.
-          You’ll be keeping the company open for multiple further years, likely incurring multiple further professional fees.

 

Close the company:

If the funds are under £25,000, this is normally a no brainer.  Striking the company off costs £10, and you get CGT treatment on the funds (normally a good thing…though do check with your accountant re entrepreneurs relief).

If the funds are over £25,000, a formal MVL is required.  This is more expensive than a company strike off, even with our low fees.  However, where you do qualify for entrepreneurs relief, you’ll get all the cash out within a few months, and will suffer a little less than 10% personal tax on it.