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MVL and ITTOIA05/S415 : using directors loans at point of liquidation

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    MVL and ITTOIA05/S415 : using directors loans at point of liquidation

    Hey all

    Quite a lot of threads already on MVL but I thought I'd add the benefit of my research seeing as I'd spent the time on it anyway. This might help if you're considering liquidating and have > £25k to distribute.

    Over the years there has been some chatter about the role of directors loans in MVL, specifically in repaying the loans through a paper transaction on distribution. In the past it was considered a risk in that HMRC were looking for a test case to take to court, where they could prove that a directors loan was in fact income and hence liable to dividend tax at 38% rather than 10% BADR. It fell under s415 tax. This appears to have mainly targeted directors loans that were taken out over a long period of time, perhaps at regular intervals, and even with s455 paid. So directors would take such loans and then eventually, maybe years later, have them repaid on liquidation via a paper distribution, or a distribution in specie as it is known.

    However, a test case was never taken to court.

    Since then, HMRC have issued internal guidance that confirms that there won't be any tax due on distributions in specie to repay directors loans. This guidance can be found at: CTM61559 - Company Taxation Manual - HMRC internal manual - GOV.UK

    I'm certainly not a fan of long term (or regular) loans and wouldn't want to put myself through s455 let alone s415. BUT there is an option provided by many insolvency firms now that makes use of this ruling, to expedite funds to shareholders on liquidation. Normally you would wait weeks for the bank to close your business account and transfer funds to a liquidator account, and then wait months for the liquidator to distribute the capital. Now, many insolvency firms follow all necessary legal procedures and then tell you to transfer the funds yourself, from your business account to your shareholders' accounts. This becomes a very-short-term directors loan, which is then repaid through a distribution in specie within a few hours.

    So it's food for thought. I appreciate not all insolvency firms will be keen on this, but company shareholders will be keen to keep control of their funds by using this mechanism, especially seeing as HMRC have issued guidance on it.

    Some interesting reading on here too (I have no affiliation to these firms and have not used them):-
    Members Voluntary Liquidation (MVL) | Frost Group
    Update on HMRC’s position on Distributions in Specie in Solvent Liquidations | Insolvency & Corporate Recovery
    Last edited by ChimpMaster; 16 November 2020, 12:34.

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