Members' Voluntary Liquidation

Partner Sam Talby explains the tax benefits of using a Members’ Voluntary Liquidation (MVL) to close a solvent company.

The owners of a solvent company might want to call time on it for a variety of reasons including:

• Retirement of the main owner/manager of the company.

• Family owned business where some of the subsequent generations wish to continue with the business and others wish to extract their share.

• A Reconstruction of the company is required to return excess capital to shareholders as capital rather than as dividend thus avoiding high rates of income tax.

The above can be achieved through a Members’ Voluntary Liquidation (‘MVL’) and this article will confine itself to the tax treatment of company assets on dissolution principally through MVLs.

Current Position affecting individual shareholders

For individuals, the tax changes introduced in the Corporation Tax ACT 2010 (‘CTA’), mean that a Solvent Liquidation will, in the majority of cases, offer the most tax effective method to extract cash and assets from a company. Section 1030A of CTA 2010, replaced the extra statutory concession (ESC C16) and states that where the total distributions in anticipation of an informal striking off exceed £25,000, any such dividend distribution would be treated as an income distribution rather than a capital gain.

For tax year 2015/16 on an income distribution by way of dividend, basic rate taxpayers would pay no further income tax but higher rate taxpayers would pay an effective 25% rate and an additional rate payers an effective dividend tax rate of 30.56%, compared to capital gains tax rates of 18% within the basic rate band and 28% for gains falling within the higher and additional rate, after the application of the capital gains tax allowance (which for the tax year 2015/16 is £11,100). In the case of trading companies its shareholders may even be able to take advantage of Entrepreneurs’ Relief and be taxed at an effective rate of 10%.


The tax position on dividends is changing in the tax year 2016/17, with each individual effectively being allocated a tax free banding for dividends of £5,000 with dividends over that level being charged at the following rates; 7.5% for base rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional tax rate payers. This makes the appeal of a capital distribution even more attractive, particularly if larger values are involved.


Each individual’s circumstances will vary on a case by case basis and with that variation comes the need for specialist advice. As insolvency practitioners, we can advise on the MVL process and the benefits of entering into an MVL, it is our practice to always look to work alongside your own tax advisor in order to protect your tax position. Below are some illustrations to demonstrate the benefits of using Solvent Liquidation as opposed to Informal Striking Off as a means of dissolution.

ABC Examples

Company A Limited (‘CAL’) 100% Shareholder

CAL’s assets are machinery and cash from the sale of stock, which after discharging creditors and corporation tax total £40,000. A dividend of £20,000 was made in anticipation of the company being struck off. The cost of the shares on incorporation 10 years ago was £2,000.

Under an informal Striking Off, the total distributions in anticipation of winding up are £38,000, and if not formally wound up these could be treated as an income distribution.

If the 100% shareholder is a higher rate taxpayer, his income tax will be due at an effective rate of 25% on the £(40,000 -2,000=38,000) = £9,500. In tax year 2016/17, this calculation would change in that the first £5,000 of dividend would be tax free, with the balance being subject to tax at 32.5% resulting in tax payable of £10,725.

If a MVL were used then in tax year 2015/2016, a capital distribution would produce the following result, assuming the situation qualified for Entrepreneurial Relief. The capital gain would be calculated as £(40,000 – 2,000) = £38,000 less the annual allowance of £11,100, leaving £26,900 at 10% = £2,690, which together with the income tax due on the earlier distribution of £20,000 assuming a basic rate tax payer at 25% = £5,000, makes a total of £7,690.

In tax year 2016/2017, the capital distribution would remain the same, resulting in tax of £2,690, however the income on the earlier distribution will change to take account of the dividend allowance of £5,000, and tax on the balance of 32.5% i.e. £4,875. The total tax payable being £7,565.

Method of cessation Tax Year 2015/2016 tax due Tax Year 2016/2017 tax due
Striking Off and Income distribution £9,500 £10,725
MVL and capital distribution £7,690 £7,565


Company B (‘CBL’) 50% Shareholder

CBL has goodwill valued at £30,000, having incorporated 10 years ago. Cost of shares £2,000 (£2,000 each). There are no other assets. Trading profits are low and accounting and other administrative costs outweigh effective tax savings. The two equal shareholders are able to make use of disincorporation relief and continue to run their business as a partnership. Disincorporation allows the goodwill to pass with no charge to corporation tax, however it is treated as a distribution to shareholders.

In tax year 2015/16, if one shareholder is a basic rate taxpayer, there would be no additional income tax to pay on their one half share. If however the other shareholder is higher rate, then income tax is due at an effective rate of 25% on the one half share valued £(30,000 - 2,000 = £28,000) of £7,000.

In tax year 2016/17, the dividends would be subject to the dividend allowance of £5,000 and the basic rate tax payer would pay tax on the balance at a rate of 7.5% producing tax payable of £1,725 and the higher rate taxpayer would be due to pay £7,475.

Assuming Entrepreneurs’ relief applies then through a MVL the capital treatment would apply. Each shareholder would have CGT with Entrepreneurs’ relief of £(30,000 – 2,000) = £28,000 less the annual exemption of £11,100 leaving £16,900 at 10% = £1,690, so a combined total tax of £3,380.

Method of cessation Tax Year 2015/2016 tax due Tax Year 2016/2017 tax due
Striking Off: Income distribution £7,000 £7,475
MVL and capital distribution £3,380 £3,380


Company C (‘CCL’) 100% Shareholder Assets remaining > £25,000.

CCL sold its trade and assets and made a net gain after discharging corporation tax of £90,000. All that is left is now cash. The cost of the shares on incorporation 10 years ago was £1,000.

Applying the income treatment to the 100% shareholder, who is assumed to be a higher rate tax payer, income tax will be due at an effective rate of 25% on £(90,000-1,000=89,000) = £22,250 under the current tax regime. In tax year 2016/17, this calculation would change, with the first £5,000 of the dividend being tax free and the balance being subject to tax at 32.5% resulting in tax payable of £30,550.

Again assuming Entrepreneurs’ relief applies, if a liquidator is appointed to formally wind up the company under a MVL, then the capital treatment would apply. The capital gains tax with entrepreneurs’ relief would be £(90,000 -1,000) i.e. £89,000, less an annual exemption not used against other capital gains in the year of £11,100, leaving £77,900 at 10% = £7,790.

Method of cessation Tax Year 2015/2016 tax due Tax Year 2016/2017 tax due
Striking Off: Income distribution £22,250 £30,550
MVL and capital distribution £7,790 £7,790


Key Points

Since the changes introduced by the Corporation Taxes Act 2010 and the new dividend rate band in many instances a members’ voluntary liquidation can be used to obtain tax benefits for shareholders.

Under a MVL, the distributions made by the Liquidator are capital and not income in nature. Capital distributions are subject to Capital Gains Tax (‘CGT’) and not Income Tax.

If the company’s distributable assets are £25,000 or over then in order to obtain entrepreneurs’ relief the company must be formally liquidated using the MVL procedure. If applicable this can reduce the tax payable to 10%. With annual CGT reliefs available the tax payable can be further reduces as illustrated.

Advice and Information

These examples are given as illustrations only and should not be construed as advice, specific advice on each circumstance should be obtained from the insolvency practitioner working alongside your existing tax adviser. For clear unambiguous advice and information on Members’ Voluntary Liquidations please complete our easy to use contact form and following submission a member of our experienced advisory team will contact you. Alternatively, do make contact with your local PCR office via telephone or email. It’s as easy as ABC!

Sam Talby


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