The goal of every company owner is to develop and run a successful, solvent company. However, there may come a time when the owner wishes to retire, or otherwise move on to pastures new, and so decides to bring the company to an end.
Where a solvent company is not being sold, there are two options that can be considered: members’ voluntary liquidation and voluntary strike off from the Companies House register. Being aware of the tax implications of each is crucial in helping decide which is the best choice for bringing a company to an end.
Members’ voluntary liquidation (MVL)
MVL can be commenced where three quarters of a solvent company’s shareholders agree to wind it up. A qualified practitioner (known as a ‘liquidator’) must be appointed to sell the company’s assets and distribute the proceeds, and the company’s other cash reserves, to the shareholders.
One drawback of MVL is the cost of the liquidator’s professional fees, which can total thousands of pounds depending on the size and complexity of the company.
However, the primary advantage of MVL is that, broadly speaking (and subject to the transaction in securities rules not being invoked) all distributions by the liquidator to shareholders are treated as capital distributions subject to capital gains tax (CGT) rates of 10% or 20% (depending on each individual shareholder’s annual income level). Furthermore, business asset disposal relief (formerly entrepreneurs’ relief) may be available if certain conditions are met, which would result in gains being taxed at 10%. Compared to income tax rates as high as 32.5% and 38.1% for dividend distributions, the capital treatment of distributions via MVL can result in significant tax savings. For a company with substantial assets to distribute, this saving can make the cost of the liquidator’s fees an investment worth making.
A further point to consider is that if a company owner, with at least 5% of the shares and voting rights in a company controlled by five or fewer individuals, decides to liquidate the company they cannot start a new company carrying on a similar trade within two years. If they do, then all distributions received from the liquidation of the old company will become subject to the more expensive income tax treatment. If an individual anticipates that they may want to start a similar business in the future, this limitation must be borne in mind.
Voluntary strike off
Alternatively, an application can be made to have the company struck off the Companies House register and dissolved, provided the company is solvent and has not traded in the previous three months.
The process is relatively simple, with an application being made by way of an online form, avoiding the expense of paying a liquidator’s fees.
In addition, distributions made to shareholders in anticipation of the company being dissolved are treated as capital distributions (and are therefore subject to the favourable CGT rates of 10% or 20%) up to a maximum of £25,000.
However, the main disadvantage of strike off is that if total funds available for distribution exceed £25,000 then all distributions will instead be treated as dividends, subject to income tax rates of up to 32.5% and 38.1%. A further limitation is that, where a company intends to make an application for strike-off, even distributions made before the application is submitted count towards the £25,000 limit.
Where a company has assets in excess of £25,000 to distribute, strike off may not be an attractive option.
Ultimately, which option is best will depend on the particular circumstances of those involved. It is therefore important that company owners are aware of the different alternatives available to help them make an informed choice about which option will allow them to bring their company to an end in the most tax-efficient way possible.