What is a Members' Voluntary Liquidation?
While liquidation is often associated with insolvent companies, there are in fact many reasons why you may be considering closing your profitable company using such a process. Here are the key things to know about a Members' Voluntary Liquidation (MVL):
- An MVL is the most tax-efficient way to close a solvent company and distribute its assets to shareholders
- Distributions are treated as capital gains, not income and may also qualify for Business Asset Disposal Relief at 18%
- An MVL is only suitable if the company can pay all its debts in full within 12 months
- If the total distribution is £25,000 or less, a simple strike off may achieve the same tax outcome at lower cost
- Directors must sign a Declaration of Solvency and providing a false declaration is a criminal offence
The two ways of closing a solvent company
If you are approaching retirement and there is no one suitable to pass the business on to, maybe you are moving on to a new venture, or the market may have simply moved on rendering your company surplus to requirements, you may be considering your options for winding down your solvent business and extracting the proceeds within it.
Regardless of the reasons for bringing an end to your solvent company, there are two main ways of closing this kind of business. First is a simple strike off which can be achieved via completion of a DS01 form which is then submitted to Companies House. Alternatively, you could opt for a formal liquidation process known as a Members’ Voluntary Liquidation.
Much of this decision will come down to the amount of money you have tied up in the company. If you have over £25,000 in distributions to make, an MVL could be the most beneficial and tax-efficient way for you to achieve this. Let's take a look at the differences between these two processes:
| | Members' Voluntary Liquidation (MVL) | Strike Off |
| Best when | Company is solvent with over £25,000 to distribute | Solvent, under £25,000 to distribute, no debts, stopped trading |
| Tax treatment | Distributions taxed as capital gains; Business Asset Disposal Relief may apply at 18% | Distributions above £25,000 treated as income |
| Costs | Typically around £4,000 + VAT | £13 online / £18 by paper |
| Requires an insolvency practitioner | Yes | No |
| Signed off by | Directors sign the declaration of solvency | Majority of directors sign the DS01 |
MVLs and Business Asset Disposal Relief
An MVL allows for all proceeds tied up in a company to be extracted and distributed to shareholders in a tax-efficient manner. With an MVL, funds are paid out via capital distribution, meaning that distributions are taxed as capital gains rather than income.
In many cases shareholders will be able to take advantage of Business Asset Disposal Relief, which reduces the tax liability further, down to 18%. Business Asset Disposal Relief has a lifetime limit of £1m per person and is available to those disposing of the shares of a trading or holding company or group which they have held at least 5% of the voting rights for at least two years. Business Asset Disposal Relief is a government tax relief scheme and you can read more about it here.
“The directors who benefit most from an MVL are those with significant retained profits who want to extract the value as capital rather than income. For a company with £100,000 or more to distribute, the tax saving compared to taking dividends and striking off can be substantial and often significantly eclipses the cost of the MVL itself.”
— Jonathan Munnery, Partner, UK Liquidators
Testing a company’s solvency
The MVL process is particularly suited to companies with in excess of £25,000 worth of cash and assets to distribute. This is an alternative to striking off the company using a DS01 form which would see all profits classed as income and taxed accordingly. MVLs are only suitable for solvent companies. A company’s solvency will be tested using the following metrics and a Declaration of Solvency must be signed as part of the MVL process:
- Pay in full all of its current liabilities within 12 months
- Pay any interest due within 12 months
- Settle any contingent liabilities which arise or are still ongoing at the time of closure
The role of a licensed insolvency practitioner in an MVL
As a formal liquidation process, an MVL can only be entered into under the guidance of a licensed insolvency practitioner who will assume the role of liquidator. An MVL works in much of the same way as an insolvent liquidation, with the liquidator responsible for realising the company’s assets, settling any ongoing disputes, before distributing the proceeds.
They key difference is that with an insolvent liquidation, the proceeds would be paid to outstanding creditors, while in an MVL, the proceeds are distributed amongst the company’s shareholders. Following clearance from HMRC, the company will then be dissolved and its name removed from the register held at Companies House.
As licensed insolvency practitioners, UK Liquidators are here to help guide you and your company through a Members' Voluntary Liquidation process once the time is right for you to wind down the affairs of your solvent limited company. Speak to a member of the team today to take the first step.
