Closing a solvent limited company – what’s the rush?

Business owners hoping to close a solvent limited company through the liquidation route may accelerate their plans in light of upcoming tax rises. As announced in the 2024 Autumn Budget, Capital Gains Tax rates were increased with immediate effect, and plans to increase Business Asset Disposal Relief, a further tax advantage of an MVL, are fast approaching.

Mike Jenkins, Insolvency Director at Begbies Traynor Group in York, looks at the future of Members’ Voluntary Liquidations and what company directors can do to mitigate their tax liabilities as the goalposts change.

What’s the difference between liquidating now – rather than later?

While an MVL continues to offer tax advantages, closing a solvent limited company sooner, rather than later, could be more tax efficient in view of upcoming tax hikes.

Following the 2024 Autumn Budget, Capital Gains Tax rates increased to 24% from 20% for higher rate taxpayers and to 18% from 10% for basic rate taxpayers.

Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, is a key tax advantage of an MVL for company directors that meet the qualifying conditions. It reduces Capital Gains Tax to a flat rate of 10%, however this is set to rise, here’s the timeline of changes to BADR rates.

Business Asset Disposal Relief rates:

Until 5 April 2025 – 10%

From 6 April 2025 – 14%

From 6 April 2026 – 18%

Shareholders with substantial cash to extract will feel the weight of the percentage increase as this will result in a staggeringly higher tax bill when closing a company. A forecasted tax bill for closing a company with retained profits of £500,000 could jump from £50,000 to £70,000 (from April 2025) to £90,000 (from April 2026).

The lifetime limit for Business Asset Disposal Relief of £1 million must also be considered.

What is Members’ Voluntary Liquidation tax?

When closing a company through a Members’ Voluntary Liquidation, 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 which is highly beneficial for company directors.

Further tax relief is available through Business Asset Disposal Relief when closing a limited company or disposing of qualifying assets, however, there are strict conditions, such as:

• Company shareholders must have been office holders, such as a director/employee for at least two years
• Sole traders or business partners must have operated the business for two years
• Company shareholders must have held a minimum of 5% of shares and voting rights for at least two years

To qualify for Business Asset Disposal Relief, company directors must dispose of the business within three years.

What are the options for closing a solvent limited company?

Liquidating a solvent limited company through a Members’ Voluntary Liquidation is often the most tax-efficient route for limited companies with substantial retained profits. Company directors can extract funds accumulated in the business in a tax-favourable manner and seamlessly close the company under the guidance of a licensed insolvency practitioner.

A Members’ Voluntary Liquidation is often the designated exit route for profitable companies, while company strike off is reserved for companies with little to no profits. Company directors considering liquidating a solvent limited company must heed the upcoming tax changes as this may likely change the timing of a planned MVL.

For more information on timing a Members’ Voluntary Liquidation and upcoming changes to Members’ Voluntary Liquidation tax, email Mike Jenkins, Director at Begbies York at mike.jenkins@btguk.com.