Solvent Liquidations and paying less tax
We receive quite a few enquiries about how you can close down a limited company that is no longer needed and pay less tax when the shareholders withdrawn the monies from the company. This is a solvent liquidation to close the company down and is known as a Members Voluntary Liquidation (MVL).
Business Asset Disposal Relief (Entrepreneurs Relief, prior to its name change in April 2020) is available in most cases where:
- Sole traders and partners that are selling/gifting the whole or a distinct part of their business and
- Directors and employees holding at least 5% of the ordinary shares with voting rights in a qualifying trading company who sell/gift all or part of their shareholding.
The term “qualifying” means that a non-trading activities business should not carry on ‘substantial’ non-trading activities and it is generally accepted that 20% is the amount. A check of the company’s balance sheet and profit and loss account can determine the non-trading assets and may show investment properties and other investments and excessive bank and cash balances.
When the directors decide to close down a company and opt for the solvent liquidation route, they should always take tax advice from their accountant, or tax advisor. It is always quicker and cheaper if there is only the balance at bank to be distributed to the shareholders.
It may sometimes be a good idea to extend the accounting period for the company, as a set of cessation accounts will be needed to obtain tax clearance, and this is always something to consider.
Sometimes, instead of selling the asset, it can be distributed in specie by the liquidator and again this is something that can be discussed during the initial stages.
With regards to an overdrawn director loan account (DLA), this can be distributed in specie and there is no need for these monies to be repaid back to the company.
We have a guidance sheet on solvent liquidations which answers some of the most common questions and concerns that directors have. If you would like to receive a free copy, please email debbiecockerton@dcabr.co.uk. You may also pass this to any of your clients who may be considering solvent liquidation to close down their company.
The earlier that advice is sought from an insolvency practitioner, the better and then there are options. DCA Business Recovery offer free advice in complete confidence and will assess the situation and look for a solution to the problem. The dedicated ICPA Freephone Hotline on 0800 066 2544 is open 365 days a year, from 8am to 8pm should you or your client wish to discuss any aspect of insolvency.
