Entrepreneurs’ Tax Relief is Changing – How will it affect your plans for closure?

Changes to Members' Voluntary Liquidation process - Business Asset Disposal Relief replaces Entrepreneurs' Relief

Changes in the rate of Entrepreneurs’ Tax Relief came into effect in April 2016, causing a rush to extract profits via Members’ Voluntary Liquidations (MVLs), the solvent liquidation process. Entrepreneurs’ Relief, previously known as Business Asset Disposal Relief, formed a major part of business exit strategies since its introduction in 2008 and has been an incentive for directors and shareholders to focus firmly on business development and growth. From April 2020, Entrepreneurs’ Relief was rebranded as Business Asset Disposal Relief (BADR).

What does the scheme offer, and why is it changing?

By claiming Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, eligible business owners can substantially reduce their tax bill when the business is sold. Shareholders who own a minimum of 5% of shares in the company enjoy a tax rate of 10% on the money extracted, which is treated as capital rather than income. The standard rates of Capital Gains Tax are 18% and 28% (2020-2021 tax year) for basic and higher rate taxpayers respectively, so the tax relief available has made a significant difference to people exiting their businesses for retirement or other reasons.

A major problem for the government has been the scheme’s cost, however - reportedly three times more than originally forecast. This alone provides them with a clear incentive to review what is on offer, with cost-savings in mind. So what changes are coming into force, and how will they affect a shareholder’s access to funds on exit?

Changes to Entrepreneurs’ Relief/ Business Asset Disposal Relief

Instead of taxing surplus funds as capital, the money could be treated as income, so attracting a higher rate of tax and in some cases tripling a shareholder’s tax bill. The reasons for closing down a business will also be scrutinised in an effort to deter ‘phoenixism,’ or starting up a new business when one has become insolvent. Tax planning is a crucial part of setting up any business, but for those with multiple companies, these changes could potentially wipe out a huge amount of profit. This would explain the surge in solvent liquidations that have taken place since the changes were announced, as business owners attempt to limit the financial damage.

Members’ Voluntary Liquidations

Begbies Traynor is the UK’s largest professional services consultancy and can advise on whether solvent liquidation is the best way to extract surplus funds from a tax perspective. Members’ Voluntary Liquidation is a process open only to solvent companies, which means that no monies should be owed, and the value of company assets should exceed the total of all liabilities. It is vital to establish beyond doubt that your company is solvent prior to embarking on a Members’ Voluntary Liquidation.

A formal Declaration of Solvency has to be signed by the shareholders, stating that the company can repay any monies owing within a 12-month period. If a company declares itself solvent and it is later found to be otherwise, directors can be held personally liable for company debts. One of the ways in which we help our clients in this respect is to review their business finances, establish solvency, and ensure that there is no risk of encountering problems once the funds have been extracted.

Act now to reduce your tax bill

Of course, the main reason for entering a Members’ Voluntary Liquidation process will probably be to take advantage of tax savings while they are still available. The impending changes to Entrepreneurs’ Relief, now known as Business Asset Disposal Relief, have caused a sudden rise in the number of MVLs being undertaken, and it is important to act quickly if you want to avoid a huge increase in tax following company closure. Our advisors here at Begbies Traynor have vast experience in corporate finance and restructure. An MVL ensures that the funds extracted are treated as capital rather than dividend income - contact one of our experts to arrange a free same-day consultation.