If you want to close your company, then there are different options available depending upon the circumstances.
What do I need to know?
A member’s voluntary liquidation (MVL) is a process, which allows shareholders to put a company into liquidation.
This may be the best option for you if your company has assets that are greater than its liabilities.
To be able to have an MVL, the director must sign a declaration of solvency to confirm that the debts will be paid in full within 12 months and 75% of the members must agree to put the company into liquidation.
Shareholders must also pass a resolution to wind up the company as they also need to pass an ordinary resolution to appoint liquidators.
What are the tax implications?
If you decide to close your company under an MVL, then the capital extracted from the company will be treated as a capital distribution.
The capital that is taken from the business will be liable to capital gains tax as opposed to a dividend.
If Entrepreneur’s Relief is applicable, then the rate of tax will be 10%, if there is enough of the Entrepreneur’s Relief lifetime limit available.
If there are funds available for distribution, this will generate tax savings.
Emma and Steve are directors of a company and both own 50% of the shares and voting rights. Each director is entitled to 50% of the profits available for distribution and 50% of the assets on a winding up.
They want to wind the company up, but they have cash assets of £10 million to distribute, so they opt for an MVL to allow them to take advantage of the capital gains tax treatment.
Both Emma and Steve are additional rate taxpayers, and both meet the qualifying conditions for entrepreneur’s relief.
Emma and Steve each receive £5 million on the winding up of the company. They both have the full amount of the entrepreneur’s relief lifetime limit (£10 million) unused, and it is assumed that for simplicity that the annual exempt amount has been used elsewhere.
The gain will be taxed at 10% and each director will pay tax of £500,000 on their distribution of £5 million.
If they did not choose to opt for an MVL, then they would have had the funds that they extracted taxed as a dividend.
You should be aware that there are anti-avoidance provisions in place to target ‘moneyboxing’ and ‘pheonixism’.
Moneyboxing is where the company keeps more funds than it needs in order to extract them as capital when the company is liquidated.
Pheonixism is where the company is liquidated, and the value is extracted as capital to set up a new company, which is essentially the same business.
Liquidation distributions which are caught by the rules are treated as income rather than capital.
You should consider all of the potential options available to close your business and make sure that you take the correct steps to ensure that you are compliant.
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