Originally published: 24 June 2022 | Last updated: 09 December 2024
If you’re looking to close a solvent company, a Members’ Voluntary Liquidation (MVL) is one of the most tax-efficient ways to unlock your company’s profits. An MVL allows you to benefit from significantly lower tax rates by treating distributions as capital gains rather than income. With additional relief options like Business Asset Disposal Relief (BADR), you could reduce your tax rate to as low as 10%, ensuring you keep more of your hard-earned wealth.
This guide will explain the key tax advantages of an MVL, take you through the process step by step and show how Clarke Bell can help maximise your savings while closing your company efficiently.
What Is Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation (MVL) is a formal process for closing down a solvent company in a structured and tax-efficient manner. It is designed for businesses that have surplus assets and can meet all their financial obligations.
Unlike a Creditors’ Voluntary Liquidation (CVL), which is used for insolvent companies, an MVL is appropriate when your business:
- Has more assets than liabilities: This means the company is in a strong financial position.
- Can pay all outstanding debts within 12 months: This includes taxes, employee payments and any other liabilities owed to creditors.
By distributing the company’s remaining profits as capital gains rather than income, an MVL ensures significant tax savings for Shareholders, making it an ideal choice for profitable businesses.
Members’ Voluntary Liquidation tax implications
During a Members’ Voluntary Liquidation (MVL), profits distributed to Shareholders are treated as capital gains rather than income. This means they are taxed at lower capital gains tax (CGT) rates of 18% or 24%, compared to income tax rates of up to 45% for dividends.
Additionally, Shareholders may qualify for Business Asset Disposal Relief (BADR), which currently reduces the Capital Gains Tax (CGT) rate to just 10% on gains up to £1 million, unlocking substantial tax savings.
However, changes announced in the Autumn Budget 2024 mean that the BADR rate will increase to 14% in April 2025 and 18% in April 2026. Directors considering an MVL should act swiftly to secure the current 10% rate by completing the process before 6 April 2025.
Key tax benefits of an MVL
One of the primary reasons Directors choose a Members’ Voluntary Liquidation is the significant tax savings it offers. By treating distributions as capital gains rather than income, Shareholders benefit from lower tax rates.
Lower tax rates
An MVL enables the application of capital gains tax (CGT) rates to distributions. CGT rates are significantly lower than income tax rates, particularly for Shareholders who fall into the higher or additional tax brackets. The difference in tax rates becomes especially meaningful when distributing large sums, enabling Shareholders to retain significantly more of their company’s value.
Annual CGT exemption
In addition to benefiting from lower tax rates, Shareholders can also utilise their annual CGT allowance, which is £3,000 in 2024/25. This allowance lets Shareholders shield a portion of their capital gains from taxation entirely, effectively making it tax-free.
Business Asset Disposal Relief (BADR)
For even greater savings, Shareholders can qualify for Business Asset Disposal Relief (BADR). Currently, BADR reduces the CGT rate to 10% on qualifying gains up to £1 million. However, the Autumn Budget 2024 introduces phased increases to the BADR rate:
To secure the 10% rate, Directors should complete their MVL before 6 April 2025. Missing this deadline could result in significantly higher tax liabilities.
Eligibility criteria for BADR
To qualify for BADR, Shareholders must meet specific conditions set by HMRC:
- Ownership of voting rights: Shareholders must hold at least 5% voting rights in the company.
- Length of ownership: The shares must have been held for a minimum of two years before the company’s liquidation.
Meeting these requirements ensures Shareholders can take full advantage of the tax benefits offered by BADR.
Why BADR matters
Using BADR can dramatically lower tax liabilities, especially for Shareholders receiving large distributions. For example:
- Without BADR, a distribution of £500,000 to a higher-rate taxpayer under the current CGT rules would attract £120,000 in CGT (24%).
- With BADR (current rate of 10%), the same distribution would incur just £50,000 in CGT, saving £70,000.
However, with the upcoming increases to BADR rates announced in the Autumn Budget 2024, timing is critical:
- If the distribution takes place after 6 April 2025, the CGT rate under BADR rises to 14%, resulting in £70,000 in tax for the same £500,000 distribution.
- After 6 April 2026, the BADR rate increases again to 18%, meaning the tax on the same distribution would rise to £90,000.
To secure the 10% rate, Directors are advised to complete their MVL before the April 2025 deadline.
Contact Clarke Bell today to begin your MVL process and ensure you maximise your savings
before these changes take effect.
The Targeted Anti-Avoidance Rule (TAAR)
The Targeted Anti-Avoidance Rule (TAAR) is a measure enforced by HMRC to ensure that Members’ Voluntary Liquidations are not used improperly to avoid paying higher tax rates. It is specifically aimed at preventing phoenixing, a practice where Directors:
- Close a company via an MVL to distribute profits as capital gains (taking advantage of lower tax rates).
- Start a new, similar business shortly afterwards to continue trading while avoiding the higher income tax rates applied to dividends.
What TAAR requires from Directors
To comply with TAAR and avoid penalties, Directors must demonstrate that the MVL is being used for a genuine purpose and not as a means of tax avoidance. HMRC expects Directors to meet the following criteria:
Avoid similar trade or business for two years
Directors must not engage in the same or a similar trade or activity within two years of closing the company through an MVL. If they do, HMRC may view the liquidation as a tax avoidance strategy.
Have a legitimate reason for the MVL
Directors must show that the MVL was undertaken for valid reasons, such as:
- Retirement: Winding up the company to step away from business entirely.
- Restructuring: Simplifying group structures or closing an unneeded entity.
- End of purpose: Liquidating a company that has fulfilled its intended role.
Consequences of non-compliance
If HMRC determines that the Targeted Anti-Avoidance Rule has been violated, the consequences can be significant. Distributions initially taxed as capital gains, benefiting from lower rates, may be reclassified as income, which is subject to much higher tax rates. This could result in Shareholders facing rates of up to 45%, drastically reducing the financial advantages of the MVL and potentially leading to substantial additional tax liabilities.
Initiating the MVL process
When initiating the MVL process, you must complete a few steps. First, you must ensure that the majority of directors agree with the decision to close the company. Then, you need to appoint an insolvency practitioner. Their job will be to liquidate your company, ensuring that it is closed within the limits of the law and relevant rules. They will also uphold your obligations to any creditors, handling the distribution of funds realised from the liquidation of your company.
A key thing in the MVL process is that directors need to swear a ’declaration of solvency’ in front of a solicitor — this can be done either face-to-face or remotely. A declaration of solvency is a document that confirms your company is solvent to the best of your knowledge. In addition to your signed declaration, you will include a list of your company’s assets and liabilities. It is important that the declaration of solvency is truthful, as you risk considerable penalties if you have knowingly signed it falsely, such as hefty fines and even a prison sentence.
Related: What Is a Signed Indemnity in an MVL?
Step-by-step guide to the MVL process
The Members’ Voluntary Liquidation process ensures that a solvent company is closed in a compliant, efficient and tax-advantaged manner. Managed by a licensed insolvency practitioner (IP), the process involves several structured steps to settle liabilities, distribute funds and officially dissolve the company. Here’s how it works:
Step 1: Notification to HMRC and Companies House
The IP notifies HMRC and Companies House of your decision to liquidate the company. A notice is also published in The Gazette, which publicly announces the liquidation and provides an opportunity for creditors or other interested parties to raise objections. This step rarely causes delays for solvent companies.
Step 2: Asset liquidation and debt settlement
The IP collects any outstanding payments owed to the company and liquidates its assets, ensuring all liabilities, including taxes and other debts, are fully settled. Depending on your current situation, company funds may be transferred to a dedicated client account managed by the IP for distribution.
Step 3: Distribution to Shareholders
Once liabilities are cleared, the remaining funds are distributed to Shareholders. These distributions are taxed as capital gains, taking advantage of lower tax rates and potential reliefs, such as Business Asset Disposal Relief (BADR).
Related: Will My Money Be Safe During the MVL Process?
Step 4: Company struck off
After all obligations are satisfied and HMRC confirms no outstanding issues, the company is formally struck off the Companies House register following a statutory three-month period, marking the end of the process.
With professional guidance from an experienced IP, the MVL process is straightforward. It ensures that the company’s closure fully complies with legal and tax requirements while maximising the benefits for Shareholders.
Clarke Bell can help
If you’re planning to close your company using a Members’ Voluntary Liquidation (MVL), Clarke Bell is here to guide you. With over 30 years of experience and more than 3,500 successful MVLs completed, our team of licensed insolvency practitioners has the expertise to ensure your company is closed efficiently and in the most tax-effective way possible.
Contact us today for a free, no-obligation consultation and learn how you can use an MVL to maximise tax savings when closing your business.
