Distribution in specie is a means of transferring an asset in its current form rather than in the equivalent amount of cash. It has typically been used during the process of a Members Voluntary Liquidation (MVL) as a convenient means of dealing with assets which have not been converted into cash at the time the company has ceased to trade, for example physical assets or overdrawn director’s loan accounts. HMRC appear to be raising concerns regarding this approach and it is widely rumoured that a test case is due to be put forward concerning this matter.
Overdrawn directors loan accounts in an MVL
It is understood that using a distribution in specie as a way of clearing an overdrawn director’s loan account in an MVL no longer satisfies HMRC’s definition of the loan being repaid. HMRC appear to be altering their approach in this area, and the distribution in specie of such a loan account may now be classed as income, instead of a capital distribution. The distribution to shareholders would therefore potentially be taxed at a higher rate of up to 38.1% as a dividend, as opposed to 10%, if the shareholder were eligible for entrepreneur’s relief.
In light of HMRC’s change of approach, director’s overdrawn loan accounts must now be physically repaid in a solvent liquidation scenario.
Directors can either repay their loan account prior to the liquidation, or upon receipt of the initial cash distribution to shareholders.
Directors who don’t have the cash readily available to repay their loan account but are also a shareholder of the company and set to receive sufficient funds from the shareholders distribution of the company’s cash at bank can repay their overdrawn loan account after distribution.
How we distribute cash in an MVL
Not every insolvency practice physically distributes the company’s cash at bank as part of the MVL process; some firms use the distribution in specie method as an alternative option. Below is the procedure we use for cash distribution in an MVL.
- We will write and request the cash at bank from the company bankers upon our appointment as Liquidator. It can take several weeks for the cash to be transferred due to the bank having to process the closure of the account. So, as an alternative, the directors may transfer the company’s cash at bank direct to our client trust account. This will expedite the distribution to shareholders.
- Once the cash has been received, we will prepare the distribution calculations and paperwork. The shareholders are required to confirm their bank details both in writing and verbally.
- Once bank details have been confirmed, the distribution paperwork will go to the Insolvency Practitioner (Liquidator) for approval.
- In cases where there is an overdrawn director’s loan account which hasn’t been repaid prior to liquidation, the director will need to physically repay the loan account into the liquidation. The loan account balance will then be distributed back to shareholders as a capital distribution.
- Once the distribution has been approved, it will then be processed, and the funds will be released.
While no legislative changes have been announced by HMRC yet, it would be prudent for anyone with an overdrawn director’s loan account to physically repay this, either before the liquidation or as part of the liquidation process. This will ensure that they don’t fall foul of any future legislative changes introduced by HMRC which may affect the tax payable on the distribution of the loan account.
How we can help
If the time has come for you to close your company and it is solvent, it’s vital to know the best options for you moving forward. We can talk you through the MVL procedure and how to deal with your director’s loan account. Closing a limited company in any circumstances is not easy, so understanding the procedures available and how they work, will help enable you to make the best decision.