When shareholders receive a dividend (whilst the company is trading) it will be classed as income and be taxed accordingly. If a company has come to the end of its useful life and is solvent, it is better for the shareholders if they close the company and receive the funds as a capital distribution.
If the distributions are less than £25,000, you can obtain concessions from HMRC for the company. These are to pay these funds as a capital distribution and then strike the company off. However, the moment distributions under this section exceed £25,000, all of the distributions will count as dividends. This leads to an additional tax liability for higher-rate taxpayers.
A warning though, an improper application for a striking off can result in a fine of up to £5,000. As well as up to seven years imprisonment and disqualification of acting as a director for up to 15 years.
If funds to distribute are in excess of this, the most appropriate way of doing this is by a Members Voluntary Liquidation (‘MVL’).
Shareholders receiving this distribution (up to £10million in their lifetime) will be entitled to entrepreneur’s tax at 10%. Significant taxation savings can be enjoyed by these shareholders.
An MVL is the most straightforward liquidation process, involving the members passing resolutions to appoint a liquidator. The liquidator realises the assets and discharges any liabilities, finally distributing the funds to the shareholders. The liquidators may also make more than one distribution to shareholders if it is beneficial to shareholders to receive these in certain tax years.
The costs of an MVL will vary for different companies. In most cases, the savings in tax will more than compensate the costs of an MVL.