By Whitney Whitfield, restructuring and insolvency manager, Armstrong Watson
As we move towards the end of another tax year, it is worth considering whether you hold assets in a company that is no longer required.
It may be that the shareholders are considering retirement or that the purpose of the company has come to an end.
The question is, how can funds be extracted from a limited company in the most tax-efficient way?
For distributions that exceed £25,000 it may be cost effective to put the company into Members Voluntary Liquidation.
This allows payments to shareholders to be treated as capital for tax purposes. If the shareholders qualify for Business Asset Disposal Relief (BADR) any gain on the capital distribution will be charged at 10% (rather than the normal 20%) on the first £1 million of lifetime gains.
To qualify for BADR as a shareholder, for the 2 years before the gain the company’s main activity must be trading or it must be a holding company of a trading company.
You must hold at least 5% of the ordinary share capital and those shares must give you at least 5% of the voting rights of the company.
The future of Business Asset Disposal Relief (BADR)
In November 2020, the Office of Tax Simplification (OTS), produced the first of two Government-commissioned reports. The main recommendations were to:
- Consider more closely aligning income tax and Capital Gains Tax (CGT) rates, being mindful that this would then require a new relief for inflation and/or a rebasing exercise
- Consider reducing the number of CGT rates and making them not dependent on income
- Reduce the annual exempt amount
- Scrap BADR and replace it with a relief focused on retirement
There have been movements to achieve the above. The CGT annual exemption is already under attack. From 6 April 2023, it reduced from £12,300 to £6,000 for the 2023/2024 tax year, and from 6th April 2024 it will be reduced to £3,000 for 2024/2025 and subsequent tax years.
As regards to BADR, this relief used to apply to the first £10m of lifetime gains but this was reduced to just £1m in the March 2020 Budget.
With a general election likely to be held in the next 12 months, and pollsters currently predicting a change in government, there may be further implications for BADR.
How could a change in government affect BADR?
Recent HMRC data showed that 9,000 people paid just £5.1bn in tax on £33.7bn of capital gains income in the latest financial year available.
That works out at an average tax rate of 14.8% – much lower than the basic rate income tax of 20% that people pay on salaries of between £12,501 and £50,000.
With this in mind, it’s likely that this inequality does not sit well within the Labour Party’s taxation manifesto and that further changes could be afoot to reduce the benefit of BADR.
If you could benefit from the application of BADR potentially saving significant amounts of tax, you should act sooner rather than later crystalising your gain.
Call 01768222030 or email help@armstrongwatson.co.uk for more advice and support.
