Contractors’ Questions: How to use Business Asset Disposal Relief (BADR) as a limited company with £300,000?

Contractor’s Question: What is there to know about Business Asset Disposal Relief on a limited company, where I want to obtain without my accountant as I am no longer a customer of the accountancy practice?

The context is that I recently moved to the dark side – PAYE -- and won't be contracting again for the foreseeable. But there is approximately £300,000 sitting in my company bank account. Corporation tax is all paid up to date.

For me to make use of BADR, is it as simple as closing my limited company and then filling out my self-assessment accordingly, where I should expect a one-time tax hit of £30,000 (BADR reducing CGT to 10%)? And presumably then I can take the remainder £270,000 for myself?

Expert’s Answer: If you are closing a solvent limited company with final profits exceeding £25,000, using a Members' Voluntary Liquidation (MVL) is a more tax-efficient option.

What is Members' Voluntary Liquidation (MVL)?

MVL allows distributions to shareholders to be treated as capital gains, which may qualify for Business Asset Disposal Relief (BADR), providing the 10% Capital Gains Tax rate which you cite.

In contrast, opting for a voluntary strike-off would result in distributions over £25,000 being taxed as income, with rates as high as 39.35% for higher-rate taxpayers.

Four key steps in the MVL process if you’re a contractor limited company 

1. Declaration of Solvency: Directors must declare that the company can pay all debts within 12 months before the MVL begins.

2. Appointing a Liquidator: A licensed insolvency practitioner manages the liquidation, including asset sales and profit distribution.

3. Distributing Remaining Assets: After settling liabilities, profits are distributed to shareholders as capital, potentially eligible for BADR.

4. Closing the Company: The liquidator applies to Companies House for company dissolution after all assets are distributed.

While MVL incurs higher costs, typically ranging from £1,500 to £5,000, the tax savings on distributions can make it more financially viable, particularly when profits exceed £25,000.

 Requirements for BADR

1. Eligibility: You must be a company director or employee holding at least 5% of the company's shares and voting rights.

2. Qualifying Assets: This includes the whole or part of a business owned for at least two years, shares in a trading company with at least 5% ownership for two years, or assets sold within three years of the business ceasing.

3. Relief Rate: BADR allows a 10% Capital Gains Tax (CGT) rate on qualifying gains up to a lifetime limit of £1 million.

4. Qualifying Period: Assets must be held for at least two years before disposal.

5. How to Claim BADR: Claims must be made through HMRC’s self-assessment system within 12 months of the January 31st following the tax year of disposal.

6. Restrictions: The company must be a trading company, and you must meet the shareholding and employment criteria.

In closing, some warnings -- TAAR, and Autumn Budget 2024…

Penultimately, keep in mind that the Targeted Anti-Avoidance Rule (TAAR) prevents shareholders from closing a UK limited company and opening a new one in the same trade within two years to avoid income tax on distributions.

If the TAAR is triggered, distributions are taxed as income rather than capital, disqualifying eligibility for Business Asset Disposal Relief.

Finally be aware, there is some concern that BADR could be restricted at Autumn Budget 2024 on October 30th, as part of potential changes to Capital Gains Tax.

The expert was Dan Mepham, managing director of contractor accountancy specialists SG Accounting.