How Much Tax Do I Pay If I Liquidate My Company?
Members’ voluntary liquidation (MVL) can be the most cost-effective way to liquidate a company if the business is still solvent.
An MVL is an effective method of liquidation that offers many financial advantages to business owners and shareholders. It’s commonly used as a way to close down a company and realise dividends when the business is still in profit.
You’ll need to pay tax on any profits, of course, but members’ voluntary liquidation tax can be surprisingly low if things are done correctly. If you’re planning to liquidate your company, the experts at Irwin Insolvency are here to explain how much members’ voluntary liquidation tax you might need to pay.
Do I Need to Pay Tax on a Members’ Voluntary Liquidation?
Members’ voluntary liquidation (MVL) can only be undertaken by a limited company that’s in a solvent position. This means that if you’re planning to wind-up operations through an MVL, once all liabilities have been paid and all assets sold off, your company will be in profit.
An MVL is commonly used as a way to wind-up operations and generate a profit for the business owner or shareholders. This means that, inevitably, you’ll need to pay some sort of tax on those profits to HMRC.
However, an MVL is the preferred method of liquidation for solvent companies because the members’ voluntary liquidation tax can be very cost-effective. The exact amount varies depending on the overall profits realised and whether shareholders qualify for different types of relief, such as business asset disposal relief (formerly known as entrepreneurs’ relief).
It’s important that you pay the correct amount of members’ voluntary liquidation tax to HMRC when liquidating your company, as failure to do so can result in serious penalties.
However, you also don’t want to overpay on your hard-earned business profits, so it’s an excellent idea to seek financial advice from a licensed insolvency practitioner when closing your business down for a profit.
How Much Members’ Voluntary Liquidation Tax Do I Need to Pay?
When a company winds up through an MVL, any liabilities – including outstanding wages, bills, and any tax owed to HMRC – first need to be paid. Once all liabilities have been settled, the company can begin to sell off its assets.
The proceeds from the sale of these assets combined with any cash reserves can then be distributed to shareholders. No tax is paid by the company on this distribution, but the shareholders themselves will need to consider how much members’ voluntary liquidation tax they need to pay.
When the company is dissolved through an MVL, these distributed profits are classed as assets. This means they are counted as ‘capital’, and are consequently subject to capital gains tax.
However, capital gains tax isn’t paid on everything. Individuals currently have an ‘annual exempt amount’ of £12,300, which means that any tax is only paid on profits above this.
Once the personal allowance has been exceeded, the capital gains tax rates vary between 10 percent and 28 percent, depending on the assets that have been realised. The vast majority of shareholders should benefit from the lower 10 percent rate, providing they qualify for business asset disposal relief.
Let’s look at an example to see how much members’ voluntary liquidation tax you may theoretically have to pay. For simplicity, let’s assume you are the sole owner and sole shareholder of the company.
Your company begins the MVL process. Once all liabilities have been paid and all assets have been sold off, there’s a grand total of £500,000 remaining. This is your total profit from the liquidation, and the £500,000 will be classed as capital by HMRC.
As the owner, you qualify for business asset disposal relief, and you will pay a flat rate of 10 percent on your profits. However, you are also entitled to a tax-free allowance of £12,300. This means you pay tax on £487,700. 10 percent of this equals a total tax bill of £48,770.
What Is Entrepreneurs’ Relief?
Entrepreneurs’ relief is the former name given to business asset disposal relief, a type of relief allowed by HMRC when liquidating companies through an MVL.
This form of relief brings any capital gains tax payable down to a flat 10 percent on anything over the personal allowance threshold. Entrepreneurs’ relief can be claimed by anyone selling all or part of their business for a profit, or shares or securities for a profit.
Business owners claiming the relief must have owned the business for a minimum of two years, while shareholders must have held their shares for at least two years.
Several other criteria might also need to be met, so it’s important to speak with a professional insolvency advisor to ensure you’re paying the correct amount of members’ voluntary liquidation tax.
Is an MVL the Most Tax-Effective Method of Liquidation?
An MVL isn’t the only way to liquidate a solvent company. The other common method is known as ‘dissolution’, and it’s a much simpler and quicker process than beginning an MVL, which can take months to be completed and approved.
Dissolution sees the closing down of a solvent company, by selling any assets, striking it from the Companies House register, and distributing any profits as dividends. While this is a quick way to liquidate the company, it also means you’ll be paying more tax on your profits.
Because dividends aren’t classed as an asset, you won’t be paying the lower capital gains tax rate of 10 percent on them. Instead, you’ll be subject to income tax. Once you’ve exceeded your personal tax allowance for the year, you’ll be paying at least 20 percent tax on all of your dividends from the liquidation.
This tax rate then increases, depending on how much you’ve made, and you could end up paying as much as 45 percent tax.
Contact Irwin Insolvency Today for More Information on Liquidating a Company
If you need assistance liquidating your company, the expert team at Irwin Insolvency is here to help.
Our licensed insolvency practitioners are ready to provide the assistance needed to successfully wind up operations, and we can provide advice on paying members’ voluntary liquidation tax and adhering to all other legal requirements.
Contact Irwin Insolvency today for your free consultation.