Business Asset Disposal Relief in Members Voluntary Liquidation
Reducing your Tax Rate to 10%
If you have run a successful company and have a built up a large amount of assets, or you have sold it for cash, you will want to withdraw those assets or cash as tax efficiently as possible. Often the best way to do this is to place the Company into Members Voluntary Liquidation and for the money to be paid out to you by way of a Capital Distribution. If you qualify for Business Asset Disposal Relief, which used to be called Entrepreneurs Relief, the tax rate charged will only be 10%, which is far less than the tax rate that would be used if you were to take those funds as income via wages or dividends.
In the Chancellors Budget in March 2020, he replaced Entrepreneurs Relief with Business Asset Disposal Relief and reduced the lifetime allowance to £1,000,000. Other than the change of name, and reduction in the lifetime allowance, very little has changed.
Briefly Business Asset Disposal Relief is claimed on the disposal of business assets or shares in your personal company provided you meet the relevant qualifying conditions for a one year period. A personal company is defined to be a company where you hold at least 5% of the ordinary share capital and those shares must give you at least 5% of the voting rights in the Company.
The main qualifying condition is that you must have owned the business directly or have owned it through a partnership in which you are a member, for a one year period. The qualifying conditions are slightly different depending on whether you have disposed of your business as a whole or you are disposing of the assets after the cessation of trade. The key difference is that if the business has ceased you essentially have three years in which to dispose of the assets.
The Company can then be placed into Members Voluntary Liquidation. The Liquidator will make a capital distribution to the shareholders, once all of the neceeary tax clearances have been received. The shareholders should then make a claim on their personal tax return for the monies they receive, or the value of the assets that are trasferred to them. The rate of tax that is payable will be 10%, once any annual allowances have been taken into account.
A claim for Business Asset Disposal Relief will not effect your Annual Capital Allowance, which will further reduce the tax payable. Currently each shareholder is entitled to £12,000 of capital gains per year, before any tax is payable. This figure changes on a year to year basis, and is dependent on the prevailing tax rates at the time.
It is always best to discuss these matters with your accountant because it will be the accountant who will make the claim for you. However if you wish to discuss Business Asset Disposal Relief or any aspect of Members Voluntary Liquidations with us please ring 01326 340 579 to speak to one of our Insolvency Practitioners.
Purnells have developed a Guide to Member Voluntary Liquidation, and should hopefully assist your understanding further