Growing a successful business can often be a lifetime’s work. But what happens when you’ve realised your growth ambitions?
As part our Exploring Exits series, we are delving into the options available to business leaders wanting to plot out the best exit route for them, taking in companies of every size and sector.
In this article, Nikki Whittle explores Members Voluntary Liquidation as a route to exit and weighs up the associated benefits and drawbacks.
What is a Members Voluntary Liquidation (MVL)?
When considering your exit strategy, it may not always be possible to sell the company to a third party or the management teams meaning that the company should be brought to a tidy conclusion. A member’s voluntary liquidation (MVL) is a tax-efficient way of dealing with this for the shareholders.
An MVL is the closure of a financially solvent company. To qualify, the company must be able to pay its creditors within 12 months and at least 75 per cent of the shareholders entitled to vote at a meeting of the creditors must vote in favour of it.
What are the positives of an MVL?
When a company is brought to a conclusion by way of an MVL, all retained profits are treated as capital rather than income. This means that the monies distributed to the shareholders are subject to Capital Gains Tax (CGT) rather than income tax. In the vast majority of cases, this amounts to a more favourable option than taking dividends due to the lower tax rate and tax reliefs that may be available.
When closing a company, the shareholder may be entitled to claim Entrepreneurs’ Relief on the capital gain. If the shareholders qualify for such relief, the qualifying shareholder will pay a flat CGT rate of 10 per cent on qualifying gains up to a lifetime limit of £10million. The advice of an accountant should always be sought in this regard.
MVLs are therefore particularly popular in instances involving significant sums of retained profits. Another benefit of closing a company through an MVL is that the process has little negative effect on your company’s reputation. This makes an MVL a good solution for solvent companies that are concerned about future trading conditions.
What are the negatives of an MVL?
A qualified insolvency practitioner is appointed to realise the assets of the company and then distribute the surplus to the shareholders. There is a certain process that must be followed meaning that fees will be payable to the insolvency practitioner. If the company has less than £25,000 in retained profit to distribute, an MVL is unlikely to be a cost-effective way of closing the company.
Nicola is a partner in Brabners’ corporate team. She is an experienced corporate and insolvency lawyer who handles a broad range of corporate transactions (on both a solvent and insolvent basis).
She acts for a range of corporate clients from SMEs to large companies advising and assisting them on various transactions including mergers, acquisitions and MBOs.
In the next article in this series, corporate solicitor Emma Thomas will look at preparing a business for sale.
