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HMRC internal manual

Company Taxation Manual

Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

These are solvent liquidations. From the date of the liquidation the shareholders are entitled to receive the value of the net assets of the company (i.e the company owes them the relevant value). At the same time the shareholders owe the company the amount of their overdrawn loan accounts.

The shareholders could therefore repay the company the full amount that they owe, in which case they will be entitled to receive the full amount of the value of the net assets as a capital distribution.

Otherwise, they can set off the value of the assets due to them against their debt (the balance of the loan account) and only withdraw, in cash, the net amount.

Where the two debts (company debt to shareholder and shareholder debt to company) are set off in this way, this will constitute a repayment of the loan account for the purposes of relief under CTA10/S458. This is because where a creditor accepts something of equal value, the debt is discharged by satisfaction not by release. There is therefore no question of ITTOIA05/S415 applying. 

It is well-established that where a sum is owed by one party to a second party and another sum is owed by the second party to the first, both debts may be cleared by means of a set-off and that is exactly the same as if both sums had actually been paid/repaid. 

Example

A participator owed the company £1,425,000 by 30 May 2017. The company went into Members Voluntary Liquidation on 1 June 2017. The net assets, including the overdrawn loan account totalled £5,300,000.

On 1 June 2017 the liquidators declared an interim distribution in the liquidation of £1,425,000 per £1 ordinary share, giving a total distribution at that date of £1,425,000. This was not paid out in cash to the shareholder but was credited to his loan account. It would be a capital distribution within TCGA92/S122. This is not a release of the loan, it is a repayment of the loan. There can be no charge under ITTOIA05/S415.

Likewise any further distributions in the liquidation up to the total balance of the net assets will also be capital distributions.