Voluntary Liquidation and Entrepreneurs’ Relief: Are You Eligible?

August 11, 2023 / Business Insolvency

For company directors, efficiency is one of the most important priorities when considering winding up operations. An efficient procedure means more retained profits go to shareholders, making for a more comfortable retirement, or serving as a healthy injection of capital for a future venture. However, with several methods of closing a company available, it can be a challenge to settle on which is the best option for a company, never mind which is most efficient. A Members’ Voluntary Liquidation (MVL) is one of the leading solutions for solvent companies, and for good reason.

In this article, Clarke Bell will discuss the MVL procedure, how it links with Entrepreneurs’ Relief, and what the procedure can do for you and your company.

What is a Members’ Voluntary Liquidation?

The MVL procedure is a formal method of liquidation available to solvent companies (i.e. ones that do not have any debts they cannot pay back). It provides directors of such companies with an efficient means of closing their company, ensuring shareholders walk away with a fair slice of the company’s value. This is possible due to a number of benefits afforded by the MVL process. 

The main benefit of the MVL process is that it offers significant tax benefits which can save the company owners thousands of pounds

Under the procedure, any profits extracted from a company will be taxed under Capital Gains rates, which are 20% in most cases. These rates are considerably lower than under Income Tax rates. In addition to this, directors may be entitled to apply for Entrepreneurs’ Relief, which can result in further savings.

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What is Entrepreneurs’ Relief?

The term Entrepreneurs’ Relief has been replaced by Business Asset Disposal Relief – as part of the Finance Act 2020. The term Entrepreneurs’ Relief is, however, still frequently used. 

Entrepreneurs’ Relief / Business Asset Disposal Relief can be used to great effect by directors of solvent companies during liquidation. If eligible, directors can apply to reduce their Capital Gains Tax rate to 10%, a notable drop from the usual rate of 20%. This rate of 10% has a lifetime limit of £1 million, and will not apply to earnings above this threshold.

Why apply for Entrepreneurs’ Relief?

Taking money out of a company using a Members’ Voluntary Liquidation and Entrepreneurs’ Relief / Business Asset Disposal Relief can save directors a hefty tax bill. As profits will be taxed under the Capital Gains rates of 20%, with a further 10% saving on realised profits up to £1 million, these savings can be incredibly advantageous, to say the least. Not only will directors be able to cover any legal, procedural, and bureaucratic costs with ease, but they can retire more comfortably or start a new venture with a larger reserve of startup capital.

Closing a company through other means is not quite so tax-efficient. Under company dissolution, for example, it is common to extract money from a company in the form of dividends or as a salary. While a useful method in its own right, dissolution does not share the same tax-related advantages as the MVL procedure, and does not entitle directors to Business Asset Disposal Relief. As such, these dividends will be taxed under Income Tax rates, which vary depending on the amount of money extracted. For gains above the largest threshold of £150,000, directors will have their realised profits taxed at a rate of 45%. These rates go a long way to highlight just how beneficial closing a company using an MVL can be.

Obtaining Entrepreneurs’ Relief during company liquidation

There is a set of criteria that determine whether you can apply for Entrepreneurs’ Relief / Business Asset Disposal:

  • Your company must have operated for no less than two years before applying for Business Asset Disposal Relief.
  • You must either be a sole trader, or a business partner of the company in question.
  • You must dispose of your company’s business assets within three years of liquidation.
  • You must not have exceeded the lifetime limit of £1 million in previous Business Asset Disposal Relief applications.

Business Asset Disposal Relief can also be applied for when disposing of shares or securities. The criteria to be eligible are as follows:

  • You must have been employed by or held an office in the company for at least two years.
  • The company must be active in trading, as opposed to investments and other non-trading endeavours.
  • You must have at least 5% of the company’s shares and voting rights.
  • You must be entitled to at least 5% of the company’s profits upon the winding-up of the company.

Assuming you meet the above criteria for either scenario, you can apply for Business Asset Disposal Relief by making a note on your personal tax return. You may also apply by completing Section A of the Business Asset Disposal Relief help sheet.

Let Clarke Bell help you

If you are considering liquidating your solvent company with an MVL, let us help you. 

We have successfully closed more than 4,000 companies using the MVL process, and distributed cash of over £559 million.

We have more than 29 years of experience in helping companies close down with an MVL, and we can do the same for you.