A guide to Business Asset Disposal Relief – while it still exists

An accountant to contractors shares possibly time-sensitive tips on the two top ways to close a solvent limited company.

Maybe it’s Autumn Budget’s rumour mill to blame, churning out that Business Asset Disposal Relief (BADR) might not make it out of the chancellor’s statement intact, writes chartered accountant Helen Christopher, founder of Beansprout Consultancy.

Whatever your view on the likelihood that BADR will be axed on October 30th — and more than a few advisers like me think Rachel Reeves will remove the relief entirely — I find myself increasingly advising on the two most common ways to close a solvent limited company.

What are the two top ways to close a solvent limited company?

The two most common methods are:

1. A voluntary dissolution of the company
2. A Members’ Voluntary Liquidation (MVL).

A voluntary dissolution is often chosen where the solvent limited company has little or no assets in the business, and where the company is no longer active and unlikely to be required in the future.

What happens with voluntary dissolution (DS01)?

Dissolution (using form DS01) is the cost-effective option, costing the director a maximum of £44 (paper application), or £33 online.

These are the new fees for dissolution which Companies House introduced on May1st 2024.

It should be noted that the company’s bank account will be frozen on the date of dissolution.

Can directors complete voluntary dissolution on their own?

It should also be noted that while a director or directors are totally free to complete a dissolution alone or unaided, we would always advocate that professional advice is sought.

That’s because while voluntary dissolution is seemingly a simple and inexpensive process, there are some tax rules to that need to be considered.

How much does MVL cost?

For example, HMRC has imposed a limit of £25,000 on the total amount of assets that can be distributed as capital, rather than income, for tax purposes before the dissolution of the company.

If assets are more than £25,000, then an MVL tends to prove a more tax-efficient option. That’s even though an MVL can cost up to £5,000, from start to finish!

What is Entrepreneurs’ Relief?

However the big advantage of an MVL if you’re for a limited company director is the access it potentially gives to Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief.

BADR can be claimed when a business is sold to another party or is placed into a solvent liquidation process.

This popular tax break can be used if the company enters a formal liquidation process. Be aware, if the company is simply dissolved using a DS01 form, BADR cannot be claimed.

What is the big advantage of Business Asset Disposal Relief?

Here’s the thing. Those who qualify for BADR pay just 10% CGT on qualifying gains up to a lifetime limit of £1million worth of capital gains.

If the assets of a company are significantly more than £25,000 (let’s say £150,000), and if a director is seeking to take advantage of BADR, simply reporting the total £125k left in the company income on the director’s tax return will not suffice.

When should directors appoint an insolvency practitioner?

In such a case, the business owner should appoint a licensed Insolvency Practitioner (IP) to act as the company’s liquidator.

The appointed IP will work to realise all assets and then distribute them to the shareholders.

While there are costs of liquidation involved with this route, it does ensure that the monies distributed to the business owner are deemed to be capital and taxed under the Capital Gains Tax rules and not treated as dividends.

This then opens the way for a BADR claim, assuming the eligibility criteria are met.

BADR eligibility (could be pared back at Autumn Budget 2024)

To be eligible to claim BADR, you (the director) must have owned at least 5% of the business for a minimum of 24 months prior to disposal.

In addition, the company must have been trading during that time.

And while we are considering Capital Gains Tax, let’s not forget that there is still a personal Capital Gains tax-free allowance, with the first £3,000 of any gain being tax free in the 2024/25 tax year.

Of course, similar to the concerns over BADR, the CGT allowance could be restricted or removed at the chancellor’s statement at the end of next month.

How a 10% CGT rate when closing a company could soon be 45%

While any changes by the new Labour chancellor would invariably be prospective, not retrospective, the removal of BADR could mean that instead of paying the 10% CGT rate via an MVL, you could be saddled with the rate of CGT which Labour reportedly wants to increase CGT to — 45%.

Worryingly, there is the prospect of so-called anti-forestalling measures being introduced with any removal of a relief like BADR, which means the relief is curtailed immediately despite not being passed into law, usually thanks to the subsequent Finance Act.

History (very much) not repeating itself?

It’s ironic that it was a Labour government in 2008 which introduced Entrepreneurs’ Relief (under then-chancellor Gordon Brown), given that the smart money now is on the current Labour government removing it.

Almost needless to say, to be smart with your company’s money, act sooner rather than later.