Corporation Tax Early Settlement Discount - Reducing the Cost of a Solvent Members’ Voluntary Liquidation (“MVL”)

When it comes to winding up a company, a Members' Voluntary Liquidation (“MVL”) is a strategic approach for solvent businesses, typically driven by the ability for shareholders to withdraw surplus assets as capital; in doing so, they can take advantage of personal tax rates as low (at the time of writing in early October 2024!) as 10% under the Business Asset Disposal (“BADR”) regime, formerly known as Entrepreneurs’ Relief.

A significant additonal benefit of an MVL is the potential for the company to secure a Corporation Tax early repayment discount.

This article delves into the advantages of a well-planned MVL and how it can provide tangible savings for the company and shareholders.

Understanding Members' Voluntary Liquidation
An MVL is a process initiated by company members to dissolve the business when it is solvent. The primary goal is to pay all creditors in full and distribute the company’s assets amongst shareholders, while minimising tax liabilities.

Proper planning is crucial to maximise those benefits and ensure compliance with legal requirements.

Key Benefits of a Well-Executed MVL
Tax Efficiency: A well-structured MVL can offer considerable tax benefits.

By taking advantage of capital gains tax reliefs, shareholders can pay less tax on their distributions, as low as 10% under the Business Asset Disposal (“BADR”) regime, formerly known as Entrepreneurs’ Relief.

Asset Distribution: MVLs enable a straightforward distribution of remaining assets to shareholders. Members can receive their shares of the assets more quickly and efficiently.

Where the shareholders wish to retain a company asset personally, most frequently a property or vehicle, they can do so at an agreed valuation by way of a distribution in specie (in kind). The asset does not need to be turned into cash and in the case of a property, the transfer would be free of Stamp Duty Land Tax (“SDLT”) as long as the property was free of mortgage/security.

The same applies to overdrawn Director’s Loan Accounts, which can also be “settled” by distribution in specie with no requirement for physical repayment.

Corporation Tax Early Repayment Discounts: Companies that engage in an MVL may be eligible for early repayment discounts on its Corporation Tax liabilities. This simply requires effective planning to get the timing of payment of Corporation Tax liabilities right, and does not come with an additional cost to the shareholders; free money from HMRC and lower fees, a win win!

Conclusion
A Members' Voluntary Liquidation, when carefully planned, can be highly beneficial for companies looking to close down while optimising financial outcomes. By taking advantage of distribution as capital, Corporation Tax early repayment discounts and other benefits, shareholders can ensure a more favourable conclusion to their operations.

In several recent cases, the Corporation Tax early settlement discount has even realised far more than the cost of liquidation, effectively resulting in a free MVL!

Steve Elliott