What are distributions in specie?

Put simply, a distribution in specie is a transfer of something other than cash, from the company, to its shareholders.

The way MVL Online operate is to get shareholders to withdraw all the company’s cash shortly prior to appointing us as liquidators. At the point the shareholders take these funds, it’s temporarily a loan, from the company, to them as shareholders. A debtor of the company.

We are then appointed as liquidator. The company still has significant net asset value, but no longer as cash. The asset is now a debtor (funds due back to the company from the shareholders).

We then declare distributions in specie during the liquidation to clear down this debtor balance.

In the long run, it’s no different to distributing cash. It purely makes a timing difference.

Why use distributions in specie instead of cash distributions?

Historically clients would leave all the company’s cash in the bank, appoint us, and we then distribute the physical cash to them. There are a few key reasons we moved to operate in the distribution in specie way:

1) risk/fear – with the distribution in specie method, the client retains control of the company’s cash at all times. They will organise the transfer from company account to personal account. We should have no need to touch it, so in turn no risk of us inadvertently misappropriating funds in some way.

2) speed of getting funds – pre liquidation clients can typically make payments from their account via online banking in seconds. If they don’t do this and leave funds in the account when appointing us, we then need to liaise with the bank to request control. This is how we operated until circa 2021. On occasion it could take multiple months for some of the banks to action our request. During this time neither the client nor we would have control of the company’s funds, which was both frustrating and occasionally concerning.

3) bank charges – banks charge us fees for opening estate accounts to use short term for any one client, then close down. Whilst we didn’t directly recharge these costs, instead absorbing it, the reality is the customer indirectly pays for all costs of a supplier. By operating how we now do, it avoids these costs.

How does this work from a company balance sheet perspective?

For this purpose, let’s assume a company pot of £60k (we do anywhere from £25k to £1m).

Before we get involved – £60k cash, no others assets/liabilities, £60k reserves.

Shortly prior to our appointment – we ask you to withdraw all company cash as a loan. Situation is now £0k cash, £60k debtor from shareholder, no other assets/liabilities, £60k reserves.

Immediately following our appointment as liquidator– we’d immediately declare an interim distribution in specie of (say) £50k. Situation is now £0 cash, £10k debtor from shareholder, no other assets/liabilities, £10k reserves.

There’s then a lengthy wait, as we advertise the liquidation, inform various parties, and wait to see if any issues are raised/claims are lodged.

Some time later – assuming no issues (or any issues have been resolved), we then move to finalise the case. We’d declare a final distribution of the remaining £10k. Situation then £0 cash, £0 debtor, no other assets/liabilities, £0 reserves.

Hence regardless of whether we distributed the actual cash or operated via the distribution in specie route:
– The starting situation is company has all cash.
– The end situation is the company has nothing, individual has all the cash

What’s the tax impact of doing it this way?

It’s no different to the liquidator distributing physical cash. You’ll see from the above, using the loan method is purely a timing thing.

You’re still taxed based on the dates/amounts on the distribution notices (whether in specie or cash).

With the distribution in specie method, the physical withdrawing of cash doesn’t trigger any immediate tax charge (as it’s just a loan at that point).

It is however worth stressing that if you were to withdraw all the funds as a loan in this manner, then not appoint a liquidator (hence no distributions in specie occurred), you’d need to find some other way to clear that loan. If not done for some time, then there’d potentially be S.455 tax due, as well as tax based on interest foregone. These are more issues for an accountant than a liquidator, we only mention them to point out you can’t simply take the (tax free) loan, and do nothing else.

I’ve heard loans are often used in dodgy tax avoidance schemes. Is this dodgy?

In a word, no(!)

For most of the schemes you may be thinking of, the main awkward bit is that the loan never gets repaid or cleared in a properly legitimate sense. It just somehow gets forgotten about (and hoped HMRC forget about it too).

If the loan is never repaid, or cleared some other legitimate way, then the clear inference is that it was never really a loan. Instead it was income for the individual. This is what HMRC argue, normally successfully.

In the situation we use here, the loan is very much a short term thing, for practical purposes. It will be cleared soon after, in a way that is taxable (though typically subject to CGT).

If I take the cash before liquidator appointment, might HMRC argue it’s dividends, rather than a distribution subject to capital gains tax?

We would suggest you be careful with both when and how you withdraw funds. Eg if you withdraw them whilst the company is clearly still trading, and you use a reference “dividend” with the bank payment, you’ll be on shaky ground if you later try to argue this was a loan to be cleared by liquidator distribution in specie.

However, on the basis you don’t do anything daft like the above, you’ll be fine. Take the funds shortly prior to liquidator appointment, and reference them as “loan pre liquidation”/similar.

The paperwork we provide, including declaration of solvency that you’ll swear in front of a solicitor, and the distribution in specie notices, will reinforce the position.

If you’re possibly thinking this all sounds a bit convoluted, HMRC are clear in their manuals here that they’re entirely satisfied with this approach.

It is a standard practice, and (as mentioned above) is done for commercial, practical, risk reducing reasons. The distribution in specie mechanism doesn’t avoid/evade any additional tax beyond the normal and clear benefits of CGT treatment via an MVL.

Is this always how distributions in specie operate?

No. As per the opening comment of this page, a distribution in specie is simply a distribution of anything other than cash to a shareholder.

Theoretically any asset could be distributed in specie. Stock, fixed assets, even buildings. We would stress MVL Online doesn’t cater to any of these. Typically they’d have other knock on consequences, most commonly tax.

I still don’t get it. It all sounds weird and complicated!

A more common/normal analogy which may help your understanding is getting an advance on your salary.

When this happens, you get the cash from your employer today. But you know it’s a loan, you’ve not yet “earned” it.

Soon after, they process the payroll where you’re paid for your work. On this payslip, they’ll work out your taxes etc, leading to your net pay. But they’ll then deduct the advance you received to give the lower amount they actually pay you.

Over the long run, both you and employer are in the same position as if they advance had never happened. Either way, you end up being paid whatever the payslip showed. And it’s the payslip which is relevant for your tax purposes.

Exact same logic applies here. The distributions in specie notices replace the “payslip”. And it’ll be no coincidence that the loan you take in advance exactly equates to the total of the distribution in specie notices. IE so equivalent to the advance being exactly what your net pay on your payslip would be, hence no cash changes hands when the distribution in specie/payslip are provided.