On 30 October 2024, the Chancellor of the Exchequer, Rachel Reeves, delivered Labour’s first Budget in over a decade, which included notable tax changes to a Members’ Voluntary Liquidation.
A Members’ Voluntary Liquidation (MVL) is a formal liquidation procedure that paves the road to a highly tax-efficient and seamless exit for solvent limited companies under the direction of a licensed insolvency practitioner.
Chris Bristow, a company liquidation expert at Real Business Rescue, shares how Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR) changes announced in the Autumn Budget increase the tax liability of company directors pursuing a Members’ Voluntary Liquidation.
What major MVL tax changes were announced in the Autumn Budget?
When closing a solvent company via the MVL route, Capital Gains Tax and Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, determine your tax bill.
Both CGT and BADR were subject to tax hikes in the Autumn Budget as the Chancellor set out to raise a record £40 billion in taxes.
Capital Gains Tax – The lower and higher main rates of Capital Gains Tax have increased from 10% to 18% and 20% to 24%, respectively, for disposals made on or after 30 October 2024.
Business Asset Disposal Relief – The BADR rate will increase to 14% from 6 April 2025 and again to 18% from 6 April 2026. The current rate is 10%, which will remain unchanged until the new financial year.
The BADR lifetime allowance of £1 million is not affected; this is the maximum relief on qualifying gains.
Capital Gains Tax rates increased with immediate effect which means that company directors seeking an MVL are subject to the new CGT rates.
However, you can save on taxes overall if you qualify for Business Asset Disposal Relief, which will not increase until 6 April 2025.
Company directors considering closing a solvent company should do so before the end of the financial year to maximise their tax savings.
Closing a solvent company – is an MVL right for you?
A Members’ Voluntary Liquidation is a popular company closure route for company directors looking to extract substantial profits from a solvent company and shut shop. A solvent company can generally fulfil its liabilities as and when they fall due.
As a rule of thumb, it’s advised that a company must have profits over £25,000 for an MVL to be cost-effective due to the associated costs and the complexity of the process.
If the company is solvent with minimal or no assets or liabilities, company strike off (dissolution), may be better suited.
What are the tax benefits of a Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation is a popular exit tool as it enables company directors to extract cash from the business in a highly tax-efficient manner and close the company.
When profits are distributed, they are treated as capital and consequently subject to Capital Gains Tax, which is more favourable than being treated as income as income tax is higher.
Further tax relief in the form of Business Asset Disposal Relief is available which reduces your Capital Gains Tax liability if the qualifying conditions are met.
Timeline for a Members’ Voluntary Liquidation
Once you’ve appointed a licensed insolvency practitioner who will advise on preparing your company for a Members’ Voluntary Liquidation, the Members’ Voluntary Liquidation process begins.
Declare solvency – Sign a declaration of solvency to declare that your company is solvent.
Shareholder meeting – A general shareholder meeting is arranged to seek shareholder votes in favour of the MVL. Once 75% of shareholders agree to the MVL, the company enters liquidation.
Notify relevant parties – HMRC and Companies House are informed and the liquidation notice is advertised in the Gazette; the public register for insolvency notices.
Distribute profits – Once company affairs and creditor claims are settled (if any), capital distributions are made, the company is dissolved and records are removed from the Companies House register.
When is the best time to liquidate a solvent company?
If you plan to liquidate a solvent contractor business soon, consider fast-tracking your plans with ample time before the end of the financial year.
Business Asset Disposal Relief is set to increase from 10% to 14% from 6 April 2025, which could mean a substantially higher tax bill.
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