What Are the Pros and Cons of an MVL?

There are many reasons why you may want to close a company. Perhaps you’re ready to retire, or maybe you simply want to move on to another venture.

When looking to close down a solvent company with assets worth £25,000 or more, an MVL is the strongest choice for directors and shareholders. As a tax-planning exercise, it can see significant savings on returns to company members.

But what exactly are the advantages? And are there any disadvantages to be aware of?

The Advantages of an MVL

MVLs Require Little Director Involvement

Closing down your company can be a daunting prospect, particularly if there’s a lot of assets involved.

When striking off your own company, you’ll have to be very careful to ensure everything goes smoothly – for example, if the process isn’t followed correctly, your assets could be assumed by the Crown.

An MVL, however, requires little input from directors. Once you’ve made your Declaration of Solvency, and gained the backing of shareholders, the process will be handled by the appointed liquidator.

Reduced Tax Rates

The main advantage of an MVL is the reduced tax rates it often offers to shareholders.

When striking off your own company, any net returns over £25,000 will be subject to Income Tax.

Returns to shareholders in an MVL, however, are subject to Capital Gains Tax as it is a capital distribution, rather than treated as income.

You May Be Eligible for Business Asset Disposal Relief

Business Asset Disposal Relief – previously known as Entrepreneurs Relief – is a tax relief that can be applied to Capital Gains Tax. It reduces the rate from 24% down to just 18%.

Sole traders, company directors, shareholders, partners, and employees may be able to qualify. You must have been actively working in the company for the past 2 years. Additionally, you must have at least 5% shareholdings in the company and 5% voting rights.

The company must earn at least 80% of its profits through trade. Investment companies, such as rental property companies, won’t be eligible.

The Disadvantages of an MVL

Creditors Must Be Paid in Full Within 12 Months

At the beginning of the MVL, you must make a Declaration of Solvency, which states that you can pay off all liabilities within the next 12 months.

If you can’t pay your liabilities within this timeframe, the MVL will automatically convert into a CVL. In a CVL, company assets are liquidated to pay outstanding amounts to your creditors, rather than going as returns to company members.

However, this isn’t too much of a disadvantage – if your company has enough assets to justify an MVL, it’s unlikely that it won’t be able to cover any liabilities.

Please Note: You shouldn’t make a false Declaration of Solvency. Knowingly trying to keep assets away from creditors can result in legal issues.

The Process Must Be Overseen by an Insolvency Practitioner

As a formal legal process, you can’t oversee an MVL yourself. Instead, the procedure must be carried out by a licenced insolvency practitioner.

Naturally, this will incur professional fees.

However, the fees will be deduced from the returns of the liquidation and will pale in comparison to the net savings made by the preferential tax rates offered by the process.

Get Free Advice Today

As a tax-planning exercise, the benefits offered by an MVL considerably outweigh any negatives. The process offers huge savings on returns to company directors and shareholders.

If you’re considering an MVL, you should get in touch with one of our insolvency practitioners today. We can assess whether or not your company is eligible and if it is the best choice for you and your business. If your assets total under £25,000, we may suggest that you pursue a voluntary strike-off instead.

Get in touch to book a free consultation today.