Company closure: normal vs MVL – which is the right option for you?

When it comes to closing your Limited Company you may be wondering what the process is, how much tax you’ll end up paying and how your accountant can help.

In this blog we take a closer look, to help you understand how it works and which option is right for you and your company.

Member’s Voluntary Liquidation (MVL)

If your Limited Company is solvent (has more assets than liabilities and is able to pay its debts in full, including interest when due), with final profits exceeding £25,000, using a Member’s Voluntary Liquidation (MVL) is one of the most tax-efficient options when closing it down. MVL also allows any distributions to your company’s shareholders to be treated as Capital Gains, and therefore may mean that it’ll qualify for Business Asset Disposal Relief (BADR), which will provide a Capital Gains Tax rate of 10%, then 14% from April 2025, and 18% from April 2026.

Voluntary strike-off comparison

If you were to opt to close without MVL, any distributions of over £25,000 will be taxed as dividend income, with dividend tax rates at the higher rate surpassing the capital gains tax rate, respectively.

Steps to MVL

1. Appoint a Liquidator – Only a licensed insolvency practitioner can manage your company’s liquidation, which will include asset sales and profit distribution
2. The declaration of solvency – As a director of your Limited Company you must firstly declare that your company is able to pay all its debts within 12 months prior to the process of MVL beginning
3. The distribution of any remaining assets – once all liabilities have been settled, the profits left are distributed amongst your company’s shareholder/s as capital, which potentially could be eligible for BADR
4. Closing down your company – your chosen liquidator will then apply to Companies House for company dissolution once all your company’s assets have been distributed

The cost of MVL

The amount of tax savings on your distributions can make the process far more viable financially, especially when your company’s profits are over £25,000.

BADR requirements

1. Eligible individuals – Only company directors or employees that hold at least 5% of the company’s shares and voting rights can be eligible
2. Qualifying assets – includes either the whole of a company or part of it owned for at least 2 years, at least 5% ownership for 2 years with shares in a trading company, or assets sold within 3 years of the business ceasing
3. Relief rate – BADR allows a 10% Capital Gains Tax rate on qualifying gains up to a lifetime limit of £1 million
4. Qualifying period – All assets must be held for a minimum period of two years before disposal
5. How to claim – All claims must be made through your Self-Assessment within 12 months from the 31^st of January following the tax year of disposal
6. Restrictions – Your company must be a trading company, and therefore you must also meet the shareholding and employment requirements

Targeted Anti-Avoidance Rule (TAAR)

The TAAR stops shareholders from making use of certain techniques to avoid income tax. In some circumstances, the company can be caught by these rules if incorporating another company with the same trade within 2 years. If TAAR is triggered, distributions will be taxed as income rather than capital. They would therefore be disqualified from being eligible for BADR.

Have questions about MVL? We have the answers!

If you’re thinking about closing your company down or simply have questions about the process and want to know more, get in touch with your Client Director at Aardvark. They can run through the process in more detail and explain the amount of tax you can expect to pay using both MVL and voluntary strike-off. Alternatively your Client Director can put you in touch with our MVL specialist partners who can handle your company closure. Get in touch with them today to find out more.