Benefitting from Entrepreneurs’ Relief in a Members Voluntary Liquidation
If you have been lucky enough to run a successful company and build up a sizeable pot of cash that you wish to take out of the company, you will want to do so in the most tax efficient way.
In many cases, the best way to do this is to enter the company into a members’ voluntary liquidation (MVL). If you qualify for Entrepreneurs’ Relief, you could benefit from a tax rate of just 10 percent, which is far less than the rate you would be charged if those funds were to be taken as income in the form of wages or dividends.
What is a Members’ Voluntary Liquidation?
A members’ voluntary liquidation or MVL is a useful tool for limited companies or limited liability partnerships if the business is solvent and you want to shut it down.
Often referred to as a solvent liquidation, this process allows you to close the business and extract the assets or cash in the most tax efficient manner for the benefit of the shareholders and directors.
When Might you Consider a Members’ Voluntary Liquidation?
There are a number of scenarios where a members’ voluntary liquidation could be used. This includes:
- Your company has assets such as vehicles, property, stock and/or cash in the bank, but the company has no future use or purpose;
- The company’s shareholders and directors would like to retire and want to transfer the assets and cash to themselves personally before closing the company down;
- You no longer want to have anything to do with the company and want to realise the assets and cash in the business;
- You want to start a new business but get the capital out of your existing company beforehand.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief allows you to pay less capital gains tax when you sell or dispose of all or part of your business. If you qualify for Entrepreneurs Relief, tax will only be charged at 10 percent instead of the normal capital gains tax rate of 18 or 28 percent. Entrepreneurs’ Relief is available on up to £10million lifetime gains, which could result in a tax saving of £1.8million.
Are you Eligible for Entrepreneurs’ Relief ?
Entrepreneurs’ Relief is available on the disposal of all or part of a business that an individual has owned for at least a year before the members’ voluntary liquidation. The assets being disposed of must make up the business, rather than simply being used by the business.
There are also a number of qualifying conditions you will need to satisfy in the year before disposal. For a company to be considered a personal company you must:
- Hold at least 5 percent of the ordinary share capital;
- Have at least 5 percent of the voting rights;
- Be an officer (e.g. a director) of the company.
The above needs to have applied for at least a year. This can either be the year prior to the liquidation commencing, or the year prior to trade ceasing. In the case of the latter, the liquidation must then follow within three years of the cessation of trade.
Once the company has been placed into members’ voluntary liquidation, the liquidator will make a capital distribution to the shareholders who must then claim on their personal tax return for the monies or assets received. This will be taxed at a rate of 10 percent.
How do I actually claim for Entrepreneurs Relief?
You do this via your self assessment tax return or use this handy government document here: https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-self-assessment-helpsheet.
Any individual can claim up to 1 million pounds relief during their lifetime.
How can we help?
Are you considering a members’ voluntary liquidation to capitalise on the Entrepreneurs’ Relief? If you want free advice on Entrepreneurs’ Relief or any aspect of members’ voluntary liquidations, please get in touch with our team.