Members Voluntary Liquidations (MVL) - Ending the life of a solvent company - The tax benefits

Tax benefits on capital extracted from your company - & Index to & advice on Members Voluntary Liquidation Topics

Where the life of a solvent company is to be brought to an end a 'Members Voluntary Liquidation'  ("MVL") is the most often used approach. An MVL is sometimes known as a "solvent liquidation" as all creditors are paid in full and the surplus is paid back to the shareholders. The main reason why a Members Voluntary Liquidation (MVL) is used is to obtain the benefit of much lower tax rates on the capital you extract from your company.

Capital returned to shareholders in a liquidation is taxed much more lightly than dividends.

There are various reasons why the directors or shareholders of a solvent company might wish for the life of the company to be brought to an end through the use of a Members Voluntary Liquidations. Those reasons might include:

1. Directors and or shareholders are in dispute with each other making it impractical for the company to continue.

2. A re-construction of the company is needed to return excess capital to the shareholders via a "capital distribution " thus avoiding high rates of personal income tax.

3. The end of trading following the retirement of the main man.

To demonstrate "solvency" the directors of the Company must swear a Declaration of Solvency incorporating a Statement of Affairs to demonstrate that the company is solvent before their company can be placed into members voluntary liquidation. Section 89 of The Insolvency Act 1986 records the detailed rules regarding that "statement of truth" (formerly a "Declaration of Solvency" was required to be sworn by the directors). The essence of Section 89 is that the directors, or a majority of them, must sign a statement of truth that:

- They have made full enquiry into the Company's financial affairs and

- They have formed the opinion that the company will be able to pay all its debts, with an addition for interest, within twelve months

If that statement of truth is made then it is the members (shareholders) of the company who are the ones who control the appointment of the liquidator in the winding-up, and not the creditors. All creditors will be paid in full, and therefore creditors have no financial interest in how the members voluntary liquidation winding-up is conducted or who the liquidator should be.

It is therefore the members (shareholders) who appoint the liquidator of their choice in a members voluntary liquidation (MVL), The liquidator then lays his annual and final accounts before members only. Read the 'possible alternative approaches' to see if a Members Voluntary Liquidation is the best step for your company to take.

A Members Voluntary Liquidation is, in many instances, used to obtain tax benefits. Under a Members Voluntary Liquidation the distributions made by the liquidator to the shareholders are "capital distributions" as opposed to "income distributions", Capital distributions are subject to Capital Gains Tax not Income Tax.  The tax payable is therefore often much reduced after applying the various capital reliefs that are available - such as entrepreneurs relief. For more information and advice on Members Voluntary liquidations please refer to the index on the left hand side of this web page.