When considering the closure of a solvent company, many directors and shareholders look to a Members’ Voluntary Liquidation (MVL) as a tax-efficient route to extract value.
At Bridgewood, we often guide clients through this process and, whilst not tax advisors, we can help clients understand one of the most crucial factors: capital gains tax (CGT).
Understanding Capital Gains Tax in Company Liquidation
Fundamentals of CGT in Liquidation
In an MVL, shareholders do not receive income (like dividends), but rather a capital distribution, which is subject to Capital Gains Tax. HMRC treats the liquidation as a disposal of shares, triggering a CGT event. Unlike income, which is liable for income tax, capital gains typically enjoy lower tax rates, especially when reliefs are available.
It’s important to distinguish between a solvent liquidation (MVL) and insolvent processes (like CVLs or compulsory liquidations). While insolvent liquidations may result in negligible returns to shareholders, MVLs often return significant value, making CGT the primary tax concern.
Legal Framework and Regulatory Considerations
An MVL must comply with the Companies Act 2006, particularly around solvency declarations and procedural filings with Companies House. However, companies should be aware of the Targeted Anti-Avoidance Rule (TAAR), which aims to prevent “phoenixing” (setting up new companies to sidestep tax) and we would always recommend taking formal tax advice if a client intend to continue with a similar trade following liquidation.
Types of Liquidation and Tax Consequences
From a CGT perspective, the MVL stands apart. While Creditors’ Voluntary Liquidations (CVLs) and compulsory liquidations typically involve little to no distributions to shareholders, MVLs are explicitly for solvent companies where all debts can be paid within 12 months. The result is a return of funds as capital rather than income.
Tax Planning and Optimisation Strategies
Available Tax Reliefs and Exemptions
The most commonly used relief in an MVL is Business Asset Disposal Relief (BADR) (previously known as Entrepreneurs’ Relief). If eligible, shareholders may benefit from a 14% CGT rate on up to £1 million of lifetime gains.
Tax-Efficient Liquidation Planning
A key step is the solvency statement, known as the Declaration of Solvency, which directors must swear in front of a solicitor. Misstatements here can lead to personal liability and adverse tax consequences. We also work closely with the client’s accountant to ensure that all final tax returns, clearance requests, and corporation tax issues are resolved before distributions begin.
Practical Considerations for MVL Tax Planning
Before committing to an MVL, shareholders should conduct a cost-benefit analysis. While professional liquidator fees apply, your accountant may point out that the tax savings often far outweigh these costs compared to informal strike-off methods, especially when BADR is available.
Proper documentation, including shareholder resolutions, solvency statements, and tax clearance letters, is essential to ensure optimal tax treatment. Discuss with your tax adviser regarding timing distributions effectively across tax years.
How can Bridgewood help?
As insolvency practitioners, we bring the structure, regulatory expertise, and strategic insight to ensure your MVL is compliant.
If you’re considering an MVL, we’re here to help you assess your options and navigate the process with clarity and confidence.
Need advice?
Book your FREE consultation or request a call back.
