What is a members voluntary liquidation “MVL”?
Although the provisions of the Insolvency Act 1986 govern the treatment of an MVL such legislation is used when a company is solvent and the shareholders wish to conclude the company’s corporate life and withdraw the assets in a tax efficient manner.
An MVL can apply to a single company or one that is part of a group of companies. Where group structures are involved the tax relationship between group companies requires careful consideration before action is taken, as does the potential impact of the substantial shareholder exemption relief.
It is quite common for a company to use the restructuring provisions of the Insolvency Act 1986 to split activities from one company into two or three economic units, with the MVL process being particularly useful in terms of containing any immediate tax charge on either the company or the shareholders.
A key reason for an MVL is for shareholders to use the capital gains tax regime to withdraw monies from a company that has no further operational purpose and, where the relevant rules apply, entrepreneur’s relief is particularly useful because the tax rate on monies distributed is 10% i.e. more favourable than higher rate income tax if money is withdrawn by way of dividend.
Where monies distributed exceed £25,000, the capital gains tax regime will only apply if an MVL process is followed and because an MVL is generally driven by tax considerations, one has to be careful about the existence of tax liabilities as at date of liquidation, whether assets should be sold by the company either before or after date of liquidation, and the impact of any director’s overdrawn loan account.
Should shareholders wish, tangible assets do not have to be sold but can be transferred to shareholders at fair value as long as the amount transferred to each shareholder is pro-rata to the shareholding position.
An MVL may take many years to conclude because of the type of asset held but the liquidator is always keen to distribute monies to shareholders as early as possible in order that the cash can be utilised elsewhere.
The various tax issues surrounding an MVL necessitate advance planning and thought such that the most tax efficient result is achieved.