There is a lot of speculation regarding what is going to be announced in the Budget on 11 March regarding Entrepreneurs’ Relief (now known as Business Asset Disposal Relief). The Labour party were reportedly going to scrap ER had they won the General Election, and we shall soon see what the Conservative Government plans to do. Whilst they have expressed strong support and encouragement for entrepreneurship, the Government have stated that they plan to review and possibly reform ER.
The possibility that ER could be heavily reformed or scrapped altogether could encourage many directors to consider closing down their solvent companies earlier than they had originally planned – to make sure that they can get the tax savings that are currently available.
How does Entrepreneurs’ Relief work?
If you’re considering selling or winding up your solvent company, ER has the potential to help you make considerable savings on your tax bill. This is because it enables you to pay just 10% in Capital Gains Tax (CGT) on profits over the lifetime of your business, up to £10m, as long as certain qualifying conditions are met.
Since 6 April 2019, the holding period for qualifying shares has increased from 1 to 2 years. Revisions were also made to the minimum 5% shareholding requirements to include a 5% economic interest test as well.
However, now it seems further reforms have been called for by the government and are set to be announced in the Budget. It is guesswork at this stage, and there’s no guarantee any reforms will be made to ER. However, changes could be made and come into effect from 5 April 2020 (if not from the date of the Budget itself).
When the reform does come in, it’s likely to be a tightening of the rules as opposed to a loosening. So, if any company owners are already considering closing down their company, they may want to speed up their decision process. Delaying until the Budget may mean being taxed very differently from the present ER regime, and losing out on considerable tax savings.
Closing down your solvent company
There are different ways for you to close down your solvent company. Depending on how much cash there is in your company, the most tax-efficient way could be through a Members’ Voluntary Liquidation (MVL).
With an MVL, any funds to be distributed aren’t subject to Income Tax, but Capital Gains Tax instead, potentially saving you thousands. Plus, you could qualify for ER as it currently stands, which could see you benefit from even more savings.
Our standard cost for a Members’ Voluntary Liquidation is £995 + VAT, + disbursements.
For more information, or if you have any questions, get in touch with our friendly and highly experienced team today.