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Capital Gains Tax and BADR changes when closing a solvent limited company
An increase in Capital Gains Tax (CGT) announced in the Autumn Budget means tax liabilities when liquidating a solvent limited have increased, along with the rate of CGT available under Business Asset Disposal Relief.
Understanding CGT and BADR changes and how this affects solvent company liquidations
The Chancellor of the Exchequer, Rachel Reeves, announced an increase in Capital Gains Tax rates and changes to Business Asset Disposal Relief in the Autumn Budget on 30 October 2024. While this shapes the future of Members’ Voluntary Liquidations, MVLs continue to offer a highly tax-efficient exit route to solvent companies.
Capital Gains Tax has increased from 20% to 24% for higher rate taxpayers and from 10% to 18% for basic rate taxpayers.
The Capital Gains Tax rate under Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, will remain at 10% this year, rising to 14% from April 2025 and 18% in 2026.
While the Chancellor tightens the gap between Capital Gains Tax and Income Tax rates, this remains significant enough to encourage entrepreneurs to invest in their businesses.
A report from the Office of Tax Simplification found that aligning Capital Gains Tax rates with Income Tax rates could theoretically raise an additional £14 billion a year for the Exchequer.
Tax implications for directors when closing a solvent limited company
When liquidating a solvent limited company through a Members’ Voluntary Liquidation (MVL), a formal liquidation procedure for solvent limited companies, profit distributions are treated as capital, rather than income, and therefore, subject to Capital Gains Tax, which is at a lower rate than Income Tax.
The annual exempt allowance of £3,000 for Capital Gains Tax which allows individuals to make a profit on gains before CGT is due remains unchanged.
When closing a company through an MVL, you can reduce your Capital Gains Tax liability from 20% to 10% if you qualify for Business Asset Disposal Relief (BADR). From 6 April 2025, the Capital Gains Tax rate available under BADR will increase to 14% and continue to rise year-on-year.
This is a key tax advantage that provides a gateway for company directors to exit and dispose of a solvent company in a tax-efficient manner. An individual can claim BADR on qualifying gains up to a lifetime limit of £1 million, this remains unchanged.
What’s the best way to close a solvent limited company, post-Autumn Budget?
Following the change in goalposts announced in the Autumn Budget, a Members’ Voluntary Liquidation remains a tax-efficient closure option for solvent companies, albeit at a greater cost from 6 April 2025.
An MVL is cost-effective for companies with over £25,000 in profits, while company dissolution (strike off) is suitable for companies with no assets or liabilities.
For more information on the tax implications of an MVL, read our Directors’ Guide on Members’ Voluntary Liquidation Tax or contact a member of the Real Business Rescue team. We offer a free consultation through our director advice line or arrange a consultation at any one of our 100 offices.
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