Closure of solvent companies to be hit by tax hikes from April 2025
Rachel Reeves’ Autumn Budget announcement on 30 October 2024 included some tax increases which could adversely impact your tax bill should you be looking to exit your business. With changes coming into effect from 6 April 2025, business owners considering their options have less than 100 days to act before tax rate increases could hit capital extraction plans.
What are the key tax changes which will have an impact?
The headline Budget announcements which will directly impact on capital extraction were as follows:
- Capital Gains Tax (CGT)
The CGT lower rate, which is charged on profits made from selling assets, increased on 30 October 2024 from 10% to 18% for basic rate taxpayers. The higher rate moved from 20% to 24%.
- CGT Business Asset Disposal Relief (BADR)
- Lifetime allowance for BADR remains at £1m.
- Until 5 April 2025 the rate of tax on these gains will be 10%, rising to 14% from 6 April 2025 and 18% from 6 April 2026.
Although the CGT main rate increases came into effect for disposals on or after 30 October 2024, there is still a window before BADR increases are introduced. Given this, timing is of key importance to optimise tax savings by distributing as much surplus capital as possible before 5 April 2025. Confirming shareholders qualify for BADR is a key step and we would encourage businesses to take formal advice if they have any qualification concerns.
The Members’ Voluntary Liquidation exit route
Whilst there are a number of ways a business exit can be achieved, a solvent liquidation – also referred to as a Members’ Voluntary Liquidation (MVL) – can offer an orderly and cost-efficient route. In contrast to an insolvent liquidation, an MVL doesn’t leave creditors out of pocket and ensures that they are paid in full before the remaining assets are distributed to shareholders.
As with any business exit, there are numerous steps to be completed before a distribution of capital can be paid out to shareholders in an MVL. These steps can take several weeks (months in some cases) to put in place, so early engagement and planning is essential. As such, any exit discussions need to be kickstarted swiftly to minimise the tax bill.
What do these changes mean for shareholders using an MVL?
To illustrate, a simple winding up of a trading company (all BADR conditions being met) with a shareholder receiving a £2m distribution of surplus capital out of the MVL, CGT payable by that shareholder would be:
- CGT pre 30 October 2024 - £300,000
- CGT pre 5 April 2025 - £340,000, i.e. £40k additional tax
- CGT pre 5 April 2026 - £380,000, i.e. £80k additional tax
- CGT after 5 April 2026 - £420,000, i.e. £120k additional tax
We are here to help
If you are assessing your business exit options and want to learn more about a Members' Voluntary Liquidation or understand more about how the Capital Gains Tax changes could impact you, please contact a member of our specialist restructuring team via the form below. Alternatively, you can contact your usual Azets advisor.