Since the 1st March 2012, any solvent liquidation (members voluntary liquidation or “MVL”) with assets of more than £25,000 needs to be liquidated by a licensed insolvency practitioner to qualify for entrepreneur’s relief.
Prior to that date the distribution of assets could be done informally without the need to actually liquidate.
Although the disadvantage to a formal liquidation is the cost, there are many advantages:
- Under capital gains tax rules, the bonus that distributions to shareholders from a trading company are taxed at just 10%
- It washes out any possible contingency claims
In an MVL, the impending distribution of assets to shareholders is advertised in the London Gazette, which usually gives a three month window for any creditors to make a final claim. This is very useful for a company with a long past, and what can be known as “unknown unknowns”. I would like to thank Donald Rumsfeld for that quote.
“Unknown unknowns” means the things you didn’t even realise in the past will one day become a problem. This is very true for independent financial advisers who would have had no idea that endowments or recommending a client to use Equitable Life could result in a claim.
I am not encouraging anyone to avoid their liabilities, but I do think it can make sense to close off a business properly when it stops trading and when the shareholders want their money back.