Closing a solvent limited company: What’s changing for business owners?
The Autumn Budget is soon upon us when the Chancellor of the Exchequer, Rachel Reeves, will take to the House of Commons to unveil Labour’s first public spending plans.
The Chancellor is expected to introduce a wave of reforms to plug a £22 billion black hole in public finances triggered by historic overspending and slow growth.
Business taxes are expected to take a weighty hit, with Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR) in the firing line. CGT and BADR are crucial to the tax efficiency of a Members’ Voluntary Liquidation (MVL) – a solvent company liquidation procedure popular with cash-rich companies.
Dean Lomas, business development manager at Begbies Traynor Group Birmingham, looks at how the Members’ Voluntary Liquidation landscape could change for exiting company directors and the consequences.
The future of MVLs – what’s at stake?
A Members’ Voluntary Liquidation is a formal liquidation process for solvent, profit-rich companies that must be disposed as they are no longer required. An MVL is handled by a licensed insolvency practitioner who will assume control of company affairs, settle creditor claims, distribute company profits and bring the businesses to an end.
An MVL is a tax-efficient process that provides company directors with a route to extract profits and bring the company to an end. It’s an essential exit tool that treats distributions as capital, rather than income, and therefore, subject to Capital Gains Tax, rather than income tax.
This tax treatment favours company shareholders as they can extract company profits in a highly tax-efficient manner. They can further reduce their tax liability through Business Asset Disposal Relief, if they qualify.
As business taxes come under the spotlight, Capital Gains Tax and Business Asset Disposal Relief could be targeted which could shape the future of MVLs.
What’s in store for MVLs at the Autumn Budget?
We look at Autumn Budget predictions regarding CGT and BADR:
Increase in capital gains tax rates – Capital Gains Tax and Income Tax bands could be aligned so there’s a smaller gap between the two. The basic rate of Capital Gains Tax (10 per cent) and higher rate (20 per cent) could increase, along with the Annual Exempt Amount (AEA) which is £3000, previously reduced from £12,300 to £6,000 from 6 April 2023.
Scrap business asset disposal relief – BADR is a form of tax relief that applies when you dispose of a business and means that you’ll pay tax at 10 per cent on all gains on qualifying assets. The lifetime limit for BADR is £1 million for disposals on or after 11 March 2020, reduced from £10 million from 6 April 2011 to 10 March 2020.
While an overhaul of CGT could reduce the tax savings generated through an MVL, it will likely remain the most tax efficient liquidation route for solvent companies due to the associated tax treatment.
Closing a solvent limited company
Business owners looking to close a solvent limited company with substantial retained profits should consider a fast-track exit before the Autumn Budget to maximise tax savings. An MVL can be greatly cost efficient for companies with ample retained profits, so urgency is advised if liquidation is your next step.
Our leading corporate insolvency service in Birmingham and the West Midlands is supported by our nationwide office network across the UK.
For more information on our market-leading MVL services delivered by Birmingham insolvency practitioners, get in touch with Dean Lomas – we offer a free and confidential consultation to Greater Birmingham Chambers of Commerce members.