The future of a solvent business may take an unintended turn as new opportunities arise, trading conditions change, and tax reforms come into play. Business owners may find themselves in a position where disposing of a business is necessary – this is where a Members’ Voluntary Liquidation can offer a valuable exit tool.
While a Members’ Voluntary Liquidation continues to offer a tax-efficient exit post-Autumn Budget, the associated tax rates have changed. Shaun Barton, a company liquidation expert at UK Liquidators, runs through the key changes announced in the Autumn Budget that affect Members’ Voluntary Liquidation taxes.
Exit tool for solvent companies
A Members’ Voluntary Liquidation (MVL) is a liquidation process that allows company directors to formerly exit their solvent business, extract cash, and close it in a highly tax-efficient manner.
MVLs are popular with cash-rich companies as profit distributions are treated as capital, rather than income. This is favourable to shareholders as Capital Gains Tax rates are lower than Income Tax which adds to the appeal of an MVL. Capital Gains Tax may be further reduced if the qualifying conditions for Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, are met.
The Chancellor announced a host of tax reforms in the Autumn Budget, which included a hike in Capital Gains Tax and Business Asset Disposal Relief rates, both central to a Members’ Voluntary Liquidation.
While these changes increase overall tax liability in a Members’ Voluntary Liquidation, the solvent liquidation route remains highly desirable and tax-efficient for those looking to close a solvent company.
What did the Autumn Budget have in store for MVLs?
The Chancellor of the Exchequer, Rachel Reeves, delivered the Autumn Budget on 30 October 2024, raising a record £40 billion to put back into
essential public services. As part of the Autumn Budget announcement, the Chancellor announced changes to the rate of Capital Gains tax levied on distributions.
Capital Gains Tax – The standard rate of Capital Gains Tax will increase from 10% to 18%, and the higher rate from 20% to 24%.
Business Asset Disposal Relief (BADR) – As announced in the Autumn Budget, the Capital Gains Tax rate available through Business Asset Disposal Relief will increase from 10% to 14% in April 2025 and 18% in April 2026.
Business Asset Disposal Relief currently reduces Capital Gains Tax to a 10% flat rate for qualifying gains up to a lifetime limit of £1 million.
What the Autumn Budget tax changes mean for asset disposals
In light of the Autumn Budget and impending changes to Business Asset Disposal Relief, an MVL before the end of the financial year could mean greater tax savings if BADR applies. BADR rates will increase in April 2025 and Capital Gains Tax rates were increased at the time of the announcement.
The Chancellor reassured that the government is committed to creating a positive environment for entrepreneurship, which is why the gap between CGT and Income Tax rates has been maintained.
While Capital Gains Tax (CGT) will be increased, the UK tax system will remain internationally competitive, with the lowest CGT headline rates compared to European countries, such as France, Germany and Italy.
