If your company has built up significant retained profits and you no longer need the business, choosing the right method to release those funds can greatly impact how much you keep after tax.
A Members’ Voluntary Liquidation (MVL) is a formal process that allows directors to close a solvent company and distribute its retained profits in a tax-efficient way. For many directors, an MVL is the most effective way to release funds while minimising their tax liability.
This article explains how an MVL works, its benefits, and what to consider before starting the process.
What Is a Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation is a formal procedure for closing a solvent company. “Solvent” means the company can pay all its debts, including any statutory interest, within 12 months.
In an MVL, a licensed insolvency practitioner (IP) is appointed as liquidator. The IP’s responsibilities include realising company assets and distributing funds to shareholders.
An MVL is often chosen because of its tax treatment. Retained profits are distributed as capital rather than income, which can significantly reduce the tax payable compared to taking final dividends.
When an MVL Is Suitable for Releasing Retained Profits
An MVL is usually the most cost-effective option for companies with retained profits around £25,000. Below this level, the tax advantage of capital treatment may be minimal and simpler closure methods, such as voluntary dissolution, might be more appropriate.
An MVL may be suitable if:
- The company has completed its purpose or trading activities
- Retained profits are above £25,000
- The company can fully pay all debts, including statutory interest, within 12 months.
Directors often use an MVL when they are retiring, finishing a period of contracting, restructuring their affairs, or no longer require the company for trading.
How an MVL Releases Retained Profits
In an MVL, retained profits are distributed to shareholders as capital distributions. This is important because capital distributions are subject to Capital Gains Tax (CGT) rather than Income Tax.
Many directors also qualify for Business Asset Disposal Relief (BADR), which can reduce the CGT rate to 14% on qualifying gains (up to the £1 million lifetime limit). This combination of capital treatment and BADR often makes an MVL one of the most tax-efficient ways to extract retained profits from a solvent company.
Steps in the MVL Process
1. Declaration of Solvency
The directors must sign a legal statement, known as a Declaration of Solvency, confirming that the company can pay its debts within 12 months. Making a false declaration is a serious offence, so the company’s financial position must be accurately assessed.
2. Appointment of a Liquidator
A licensed insolvency practitioner is appointed to act as liquidator. The liquidator takes control of the process, including notifying HMRC, Companies House, and any potential creditors via a publication called The Gazette.
3. Settling Debts and Distributing Funds
The liquidator ensures all outstanding debts are settled. Once liabilities are cleared, the remaining retained profits are distributed to shareholders as capital distributions. This can be done in cash or in specie (by transferring assets directly).
4. Company Closure
After all distributions are complete and clearance has been obtained from HMRC, the liquidator arranges for the company to be removed from the Companies House register.
Benefits of Using an MVL to Release Retained Profits
The primary benefit of using an MVL is tax efficiency. By treating retained profits as capital, shareholders often pay less tax than they would if those funds were distributed as dividends.
Additional benefits include:
- A formal process that ensures compliance with legal and tax requirements
- Flexibility in how assets are distributed, including cash or in specie
- A clear and organised closure, reducing the risk of future issues with HMRC or creditors.
Key Considerations Before Starting an MVL
Before entering into an MVL, directors should:
- Confirm the company is solvent and meets all eligibility requirements.
- Consider the timing of the liquidation, especially in relation to future business plans, to avoid anti-avoidance measures such as the Targeted Anti-Avoidance Rule (TAAR)
- Review eligibility for Business Asset Disposal Relief to maximise potential tax savings.
Planning in advance ensures that the MVL delivers the expected benefits and avoids unnecessary complications.
Planning Ahead to Make the Most of an MVL
A Members’ Voluntary Liquidation can be one of the most efficient ways to release retained profits from a solvent company. By structuring distributions as capital and taking advantage of Business Asset Disposal Relief, directors can achieve substantial tax savings.
Careful planning, accurate solvency assessments, and an understanding of the eligibility criteria are essential to making the most of an MVL. For directors with significant retained profits, it remains one of the most effective strategies for closing a company in a tax-efficient way.