An update on solvent liquidation with tax benefits

When shareholders receive a dividend (while the company is trading), it will be classed as income and taxed accordingly. If a company has come to the end of its useful life and is solvent, it’s better for the shareholders to close the company and receive the funds as a capital distribution. Wilson Field can offer a solvent liquidation, or a Members Voluntary Liquidation (MVL).

If funds are less than £25,000

If the funds are less than £25,000, then concessions can be obtained from HMRC. The concessions are for the company to pay these funds as a capital distribution and then strike the company off.

As from 1st March 2012, if a company undergoes an informal winding-up procedure, HMRC will only allow distributions up to a maximum of £25,000 to be treated as capital, and any distributions exceeding £25,000 will be categorised as dividend income.

Funds exceeding £25,000

If funds to distributed exceed £25,000, the most appropriate way of doing this is by a Members Voluntary Liquidation (MVL). The £25,000 limit will not apply, and distributions will be treated as a capital receipt.

Shareholders receiving this distribution (up to £10million in their lifetime) will be entitled to entrepreneurs’ tax at 10%. Shareholders can enjoy these significant taxation savings.

An MVL is the most straightforward of all liquidations, involving the members passing resolutions to appoint a liquidator. The liquidator realises the assets and discharges any liabilities, before finally distributing the funds to the shareholders. The liquidators may also make more than one distribution to shareholders if it’s beneficial that they receive these in certain tax years.

The costs of a solvent liquidation will vary depending on the company. In most cases, the savings in tax will more than compensate the costs of an MVL.

In summary

Once a solvent company reaches the end of its life, shareholders can close the company, taking the funds via capital distribution. If the company’s funds are less than £25,000, concessions can be gotten through the tax office via capital distribution before the company is struck off. If the finances are more than £25,000, then an MVL would be the best way forward.

Our insolvency practitioners are available to help you through this process. So, speak to us for free, impartial advice with no obligation.