How Does Business Asset Disposal Relief Work During Company Liquidation?

March 5, 2024 / Business Asset Disposal

Each year, thousands of directors choose to close down their solvent company using the Members’ Voluntary Liquidation (MVL) procedure. The directors might be taking up a PAYE-role, moving overseas or retiring. Regardless of reason, they no longer need their limited company and want to extract the money from it in the best way possible.

The MVL process is HMRC-approved and very tax efficient – particularly thanks to Business Asset Disposal Relief.

In this article, Clarke Bell discusses how Business Asset Disposal Relief works during company liquidation, why you might want to use it, and how to maximise your profits.

What is Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation is a form of liquidation for solvent companies with large reserves of retained profits – typically in excess of £25,000.

In order to use the MVL procedure, you must swear a Declaration of Solvency before a solicitor. This declaration states that, to the best of your knowledge, your company is solvent. In other words, your company can pay its debts when they come due.

Assuming your company is solvent, you will then be able to start the procedure in earnest. The directors need to appoint a licensed insolvency practitioner (like Clarke Bell) to carry out the procedure. This is to ensure the company is liquidated efficiently and with adherence to the law. The insolvency practitioner can help maximise tax efficiency, and help you obtain additional reliefs, such as Business Asset Disposal Relief.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief until April 2020, is a form of tax relief available to company directors. It is used in specific circumstances, namely during the liquidation of a solvent company or other scenarios wherein assets are sold for shareholder profit, not to repay company debts. As such, BADR dovetails perfectly with Members’ Voluntary Liquidation, working hand-in-hand with the procedure to lower a shareholder’s overall tax bill. For this reason, many directors and other shareholders utilise BADR during the voluntary liquidation of their solvent companies.

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Tax efficiency under Members’ Voluntary Liquidation

Members’ Voluntary Liquidation is a liquidation procedure used due to its tax efficiency. It is approved by HMRC and for solvent companies, typically with assets in excess of £20,000. If your company meets this description, you stand to benefit from an MVL in two key ways:

  1. The first main tax-related effect of the MVL procedure is the categorisation of realised profits. Unlike certain other procedures, profits earned as a result of the MVL procedure are categorised as Capital Gains. Such profits will be taxed under Capital Gains Tax (CGT) rates, rather than Income Tax rates. CGT rates are considerably lower than Income Tax rates, resulting in a smaller tax bill for shareholders.
  2. The second main tax-related effect under an MVL is Business Asset Disposal Relief. Shareholders can apply for BADR during or after liquidation, assuming they meet the eligibility criteria. To be eligible, you must adhere to the “rule of five”. This rule requires you to have at least 5% of the company’s voting rights, and be entitled to at least 5% of the proceeds upon liquidation. Assuming these criteria are met, shareholders may apply for BADR on any gains under the lifetime limit of £1 million.

Also Read: What is the Minimum Shareholding Threshold for Business Asset Disposal Relief? 

Applying for Business Asset Disposal Relief under an MVL

Applying for BADR is a fairly simple affair, one that can be made even easier with the assistance of your company accountant.

An application for BADR can be made in your annual Self-Assessment tax form, assuming the gains have been made during the appropriate year. If you are applying for BADR on gains made in previous tax years, you can do so using the BADR help form. Note that there is a two-year deadline for applying for BADR, meaning that gains made during 2023 must be claimed no later than the 2025/26 tax year.

Dissolution as an alternative to liquidation

Although Members’ Voluntary Liquidation is a valuable tool for directors looking to close a larger solvent company, it may not be the best option for small companies. Small companies often do not have the retained profits to properly make use of the tax efficiency provided by an MVL. If your company falls into this category, it may be wise to consider dissolution as an alternative.

Company dissolution, also known as a company strike-off, is an alternative method of closing a company. Rather than prioritising tax efficiency, company dissolution is focused on cost-effectiveness. The process can be carried out at minimal cost, requiring an application fee, Gazette notice fees, the cost of transferring any assets out of your company, and the cost of any third-party assistance.

To initiate a company dissolution, you must submit a DS01 form to Companies House, which will cost £8 through the online portal or £10 in paper format. Once initiated, you must publish a notice in the Gazette detailing your company’s upcoming dissolution. This notice grants certain parties, such as shareholders or creditors, a chance to object to the dissolution, potentially halting the process. Assuming no objections are made, you may be closing the company and removing any owned assets. Note that you should remove all assets from the company before the closing of your company is finalised, as anything that remains owned by the company past this point will be considered “bona vacantia”. This will result in the assets being transferred to the Crown, as they cannot be owned by a company that no longer exists.

Let Clarke Bell help you

Business Asset Disposal Relief can be a great benefit for company owners when they are closing down their company. It can result in shareholders paying a dramatically reduced tax bill. This tax saving will typically more than cover the cost of the liquidation.

If you are looking to close your solvent company in the most tax-efficient way, we can help you with our Members’ Voluntary Liquidation (MVL) service.

We have more than 29 years of experience in helping solvent companies close in the most efficient manner, and we can do the same for you.

Contact us today for your free advice.