Members’ Voluntary Liquidation

How Do I Liquidate My Limited Company?

If you’re considering closing down your limited company, whether due to retirement or perhaps a career change, it’s essential to understand your options. For solvent companies, a Members’ Voluntary Liquidation (MVL) can be the most tax-efficient route. Below we explore how to liquidate your limited company, the benefits of an MVL along with the tax advantages.

What Does It Mean to Liquidate a Limited Company?

Liquidation is the formal process of closing a company and distributing its assets. It involves ceasing all business operations and settling any company debts there may be.

There are two types of liquidation:

1. Solvent Liquidation – This is where a company can pay all its debts.
2. Insolvent Liquidation – when a company cannot meet its financial obligations.

What is a Members’ Voluntary Liquidation?

An MVL is a formal procedure for closing a solvent company. It involves appointing a licensed insolvency practitioner to manage the process, including selling assets, paying creditors, and distributing any remaining funds to the company shareholders.

Companies with significant retained profits generally find this form of liquidation more suitable. This is because it offers better tax treatment through Capital Gains Tax and potential eligibility for Business Asset Disposal Relief.

Tax Advantages of an MVL

One of the main reasons business owners opt for an MVL is the considerable tax efficiency it offers. An MVL distributes funds as capital gains rather than income, typically resulting in a lower tax rate. Moreover, if you qualify for Business Asset Disposal Relief, you could benefit from a reduced Capital Gains Tax rate of just 10% on qualifying distributions. This is significantly lower than the income tax rate on dividends, which can be as high as 39.35% for additional rate. As a result, MVLs can substantially reduce your overall tax liability, particularly for companies with significant retained profits.

The Steps to Liquidating a Company via MVL

Step 1: Confirm Solvency

Directors meet and agree to cease trading and begin the liquidation process. The director(s) will need to ensure that the company is solvent, meaning it can pay its debts in full, including interest, within 12 months of commencing the liquidation. If there is any doubt about solvency, professional advice will be needed.

Step 2: Declaration of Solvency

Directors must make a “Declaration of Solvency”, stating that they have made a full inquiry into the company’s affairs and believe it can pay its debts in full within the allocated time frame.

Step 3: Shareholder Resolution

If the company has shareholders, the directors must obtain shareholder approval before proceeding with the MVL. At least 75% of shareholders must pass a special resolution to voluntarily wind up the company.

Step 4: Appointment of Insolvency Practitioner

Once the shareholders have stated their agreement to liquidate the company, the next step is to appoint a licensed Insolvency Practitioner (IP) to act as the liquidator. Company Directors will then be required to file a notice of the appointment of the liquidator with Companies House within 14 days.

Step 5: Asset Realisation and Distribution

The appointed liquidator will conduct a thorough valuation of the company’s assets. Any asset at this time will be realised through a controlled sale process to maximise returns.

Step 6: Settling Outstanding Liabilities

Next, the liquidator will settle any outstanding debts the company holds in order of priority, ensuring that all creditors are paid in full.

Step 7: Distribution and Dissolution

After settling all liabilities, the company distributes the remaining funds or assets to shareholders based on their shareholding. After the shareholders and creditors have approved the liquidator’s final report, the liquidated must formally approve the dissolution of the company.

The company files its final accounts and reports with Companies House. Once Companies House approves the documents, the company officially dissolves and ceases to exist as a legal entity.

Tax Advice and Key Considerations

Before proceeding with an MVL, it’s crucial to seek advice from a qualified tax advisor. Doing so helps to ensure you’re maximising all available reliefs and complying with relevant rules. Settle all outstanding taxes, including corporation tax, VAT, and PAYE, to avoid complications during the liquidation process. Additionally, it’s essential to understand how the Targeted Anti-Avoidance Rule (TAAR) could affect your eligibility for Capital Gains Tax treatment, especially if you plan to start a similar business shortly after liquidation.

Alternatives to MVL

If an MVL is not suitable for your company’s circumstances, there are other routes to consider.

Company Strike-Off

A company strike-off involves filing a DS01 form with Companies House and is a quicker, less costly option. However, it’s only appropriate for businesses with minimal retained assets and does not offer the same tax advantages as an MVL.

Creditors’ Voluntary Liquidation (CVL):

For companies that are insolvent and unable to pay their debts, a Creditors’ Voluntary Liquidation (CVL) may be necessary. This formal process involves notifying creditors, settling liabilities, and appointing a licensed insolvency practitioner to oversee the closure.

Winding Down Your Limited Company

Liquidating your limited company through an MVL can be a highly effective strategy if your business is solvent and holds substantial assets. Not only does the process ensure a clean and compliant closure, but it also allows you to extract retained profits in a tax-efficient manner. However, the tax and legal implications of liquidation are complex making it essential to seek professional advice.