If you are looking to wind down your solvent limited company, whether this is because you are approaching retirement or simply want a career change, it is likely that you will be looking to do this in the most cost-effective way possible.
While a solvent limited company can be closed through an informal process known as ‘strike off’, in many cases, this is not the best way of achieving your aims. For companies with in excess of £25,000 to distribute to shareholders, it is likely that placing the company into a formal solvent liquidation process known as a Members’ Voluntary Liquidation – or MVL – will ultimately prove to be more cost-effective as well as tax-efficient.
When a company is struck off, funds taken out of the company will be treated as either a dividend or income and will be taxed accordingly. Closing a company through an MVL, however, means the funds distributed will be treated as a capital distribution and therefore subject to CGT.
Not only is the CGT rate lower than your income tax rate (20% for higher or additional rate taxpayers), but you may also be able to take advantage of a number of other allowances to reduce your tax bill even further during the MVL process.
The ‘Annual Exempt Amount’ is a Capital Gains Tax allowance which is given to all individuals. You will only have to pay CGT on gains which are above this amount. The annual exempt amount is subject to change; however, current allowances (2020/21 tax year) are £12,300 for individuals, and £6,150 for trusts. As the name suggests, each individual is given this allowance each year.
If you are disposing of a limited company, whether this is via a sale or through a solvent liquidation process, you will be able to utilise this tax-free allowance to reduce your CGT liability. The annual exempt amount is an individual allowance which means each shareholder can utilise their allowance to reduce their tax liability on their portion of the distribution from the company.
As well as the annual exempt amount, you may be able to reduce your tax bill even further through Business Asset Disposal Relief. This was formally known as Entrepreneur’s Relief and is subject to a lifetime limit of £1m worth of gains per individual. For distributions which qualify for Business Asset Disposal Relief, the effective rate of CGT is halved to just 10%.
Due to the manner in which distributions via an MVL are taxed, this liquidation process is often the best way to close a solvent company and extract the proceeds. An MVL can only be entered into under the guidance of a licensed insolvency practitioner which does come with costs of its own, however, for many, these costs are outweighed by the tax savings which can be made by opting for an MVL rather than strike off.
If you are a limited company director or shareholder and you are looking to close down your solvent company, talk to the experts at Real Business Rescue. You can arrange a free consultation with a licensed insolvency practitioner who will be able to talk you through the entire MVL process and determine whether this is the most appropriate course of action for you and your company. With over 80 offices across the length and breadth of the UK, you are never far from expert help and advice. Call the team today on 0800 644 6080.