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Distribution in Specie
2 September 2022

When a director is ready to close down their solvent company – perhaps to retire or take on a PAYE-role due to IR35 – their best option is often a Members’ Voluntary Liquidation (MVL).

In the MVL process directors sell off assets and distribute the proceeds, and/or they can transfer company assets – which is known as ‘distribution in specie’.

In this article, Clarke Bell will discuss the MVL process, distribution in specie, and how you can utilise this method of distribution.

What is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation is a way for a director to close down their company when they no longer need it – perhaps because they are retiring. It is a formal procedure which is only available to directors of solvent companies – i.e. ones which have no debts which they cannot pay back.

The popularity of MVLs is primarily due to the fact that they are often the most tax-efficient way to close a solvent company and distribute its assets to its shareholders. By using a MVL, the distributed funds are subject to Capital Gains Tax, rather than higher Income Tax. This makes it a very tax-effective process.

Also, if you qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) you can even benefit from a lower 10% marginal rate on distributions.

The assets are usually liquidated during the MVL process, allowing directors to take advantage of the tax benefits inherent within an MVL. However, directors can opt to distribute company assets in specie, if they would prefer.

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Also Read: Who Initiates a Members Voluntary Liquidation?

What is a distribution in specie?

A distribution in specie refers to the distribution of an asset in its current form, rather than first liquidating it and distributing the proceeds. It is a practice often used in the MVL process.

If you are planning on putting your company through the MVL process, you could make use of a distribution in specie depending on your future plans and those of your shareholders.

Firstly, if you intend to close one company in order to open another, you could choose to distribute some of your old company’s assets in specie to the new one. This allows you to make use of these assets, without having to pay for new equipment.

Secondly, you could use a distribution in specie to satisfy your obligations to other shareholders. In this case, you could offer shareholders two types of assets; financial assets and physical assets. Financial assets include bonds, shares, and other such assets. Physical assets refer to pretty much everything else, such as stock, equipment, property, and even land. As such, you have much more flexibility and control over how you wind up your company.

Limitations of a distribution in specie

Although a distribution in specie offers a bit more flexibility to directors, the practice does have some limitations. Namely, a company cannot distribute assets in specie if the value of those assets exceeds what it can distribute to shareholders. If a company does distribute assets of a higher value than it should, this can result in legal issues for the distributor and the recipient. It will be viewed as an unlawful return of capital, as the distribution exceeded the distributable value, and will carry the appropriate penalties if not remedied.

For shareholders, the situation is a bit different. If a shareholder knowingly receives assets categorised as an unlawful distribution, they will be expected to either return the asset back to the company, or pay the value of the asset. A defence can be made in court if a shareholder unknowingly receives an unlawful distribution. However, if this shareholder is a director of a private company, this defence is not likely to be accepted, as it is highly unlikely that they have no knowledge of what their company could distribute lawfully. HMRC will almost certainly argue this in court, often resulting in a charge tax.

Tax implications of a distribution in specie

When conducting a distribution in specie, the actual market value of the asset will be treated as taxable. In most cases, the value of the asset will be taxed as income once in the recipient’s hands, with the exact amount being dependent on the relevant rate. However, there are other cases that can affect how a distribution in specie is taxed.

When making a distribution in specie as part of an MVL, the value of the asset is not taxed as income. Instead, it is taxed as a capital distribution once in the ownership of a shareholder, which carries a considerably lower rate of tax. This means that even a distribution in specie can benefit from the tax implications of an MVL, making it a viable tool for companies with a large amount of high-value assets.

A distribution in specie should not confer any debt onto the recipient. While this is not normally the case, it does happen, and is seen by HMRC as a transfer in satisfaction of a debt. This carries a Stamp Duty Land Tax (SDLT) charge. If this happens, the value of the debt will be subject to tax, rather than the value of the asset. However, there is an exception made in the case of a distribution made during the winding-up of a company.

Let Clarke Bell help

If you have decided to close your company, let Clarke Bell be there to help you.

We have over 28 years of experience in helping directors find the best path forward, and we can do the same for you.

For a free, no-obligation consultation, contact us today and find out what we can do for you and your company.

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