WHY IS AN MVL MORE TAX EFFICIENT?
In the ordinary course of business, any funds distributed to shareholders by way way of a dividend are taxed as income. Dividend income can currently be taxed up to 38.1% for additional rate tax payers.
In a Members Voluntary Liquidation all funds distributed are treated as a capital distribution, and subject to Capital Gains Tax (CGT) rates. CGT rates are always lower than income tax rates; reducing the personal tax burden for shareholders and maximising the hard earned company funds to be extracted.
Extracting funds as a capital distribution comes with more benefits! In some circumstances a shareholder may be able to claim Business Asset Disposal Relief (formerly known as entrepreneurs relief) on funds extracted from a Members Voluntary Liquidation. This means that any funds extracted will only be taxed at 10%, providing the qualifying conditions are met.
The main conditions for Business Asset Disposal Relief is that the shareholder holds at least 5% of the shares in the company, and has done for a period of at least 24 months.
Perhaps more importantly the shareholder must not trade in the same or similar industry for a further 24 month period after the relief is claimed to avoid falling foul of the Targeted Anti-Avoidance Rules.
Ballard Business Recovery are not tax advisers but we regularly work with accountants to agree a strategy that results in shareholder extracting funds from a Members Voluntary Liquidation in the most tax efficient manner.
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