Perhaps you are retiring, restructuring, or your company is simply no longer needed. Thomas Westcott Business Recovery & Insolvency are able to assist shareholders in extracting cash and assets in a tax efficient manner. When the decision has been made to wind up a dormant company and to distribute any remaining assets to the shareholders there are essentially two ways in which this can be done:

• Informal strike off
• Formal MVL

Tax implications

Under current legislation, where total distributions in anticipation of informal striking off total £25,000 or more, any such distribution would be treated as income rather than a capital gain. If we look at what this means for tax payers, a basic rate tax payer would pay no further income tax, higher rate tax payers would pay an effective 25% rate and additional rate payers an effective 36.11%, compared to capital gains tax rates of 18% for basic rate and 28% for higher and additional rate. In certain circumstances shareholders may be able to receive funds taxed at 10%, if the capital gain qualifies for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief).

 

Striking off

Prior to 01 March 2012, companies could take advantage of an Extra Statutory Concession 16 (ESC 16) which provided that, when a company went down the informal striking off route, distributions to shareholders were treated as capital distributions rather than income distributions, subject to certain conditions.

 

As of 01 March 2012, the ESC no longer applies. The new legislation provides that capital treatment is only allowed where total distributions of less than £25,000 are made. If distributions of more than £25,000 are made then ALL the distribution is treated as income. The decision to follow an informal striking off route will now require a lot more consideration depending on the amounts left to distribute.

 

Members Voluntary Liquidation(MVL)

A formal winding up route appears to be the only available solution to shareholders wishing to treat distributions of more than £25,000 as a capital gain. To commence an MVL, it will be necessary for the Directors to produce a Statement of Solvency which will include the estimated realisable value of the company's assets; the liabilities; the estimated cost of the Liquidation process; and the expected return to shareholders.

 

A Licensed Insolvency Practitioner is required to carry out an MVL and will assist the Directors in producing the Declaration of Solvency; calling the meetings of shareholders; collecting the assets; and distributing them amongst the creditors and shareholders. The main benefit of an MVL can be the tax saving. A basic example of potential tax savings is shown below:

• Company A Limited is left with £100,000 of cash after selling its trade and assets. Corporation tax on the sale of the assets and all other liabilities have been settled. The cost of the share on incorporation 10 years ago was £1,000.
• Under the information striking off route, the total distribution of £100,000 is above the £25,000 limit and therefore income tax will apply.
• Assuming the 100% shareholder is a higher rate taxpayer, income tax will be due at an effective rate of 25% on £(100,000 – 1,000) = £24,750
• If a Licenced Insolvency Practitioner is appointed as a Liquidator to formally wind up the company under an MVL, then capital treatment would apply. The capital gains tax with Business Asset Disposal Relief would be £(100,000 – 1,000), less annual exemption of £12,300 (for 20/21 tax year), which leaves £86,700 at 10% = £8,670

It is easy to see in this example that the shareholder saves over £16,000 of tax.

Apart from the obvious tax savings, an MVL also has the following benefits:

• A Liquidator will advertise for all creditors to claim within the Liquidation. If creditors do not subsequently claim within the prescribed time limit, they may not (with very few rare exceptions) later apply to have the company restored to the Register in order to pursue it.
• The process is usually low cost, depending on what assets and liabilities are left within the company at the date of Liquidation.
• The process is quick and carried out by a Licenced Insolvency Practitioner.
• A distribution can be made to shareholders shortly after the company is placed into Liquidation, in certain circumstances

If you are considering winding up a solvent company which has distributable assets over £25,000, advice should be sought from both a tax specialist and a Licensed Insolvency Practitioner.

*Tax allowances subject to change