In recent blogs I’ve talked about getting to the point when, after maybe years of effort in building up a business and there comes a point when you just want to stop. We’ve already looked at Entrepreneurs’ Relief (ER) available on Capital Gains Tax (CGT) either when you cease in business or when you want to off-load your shareholding in the company, and different routes for getting ER if you’re selling your shares.
It may have struck you that, with regard to limited companies, because there are different rules for ER in this scenario, there’s a gap in the available relief – what if you don’t or can’t sell your shares, and you can’t find a buyer for the company’s business, and you just want to wrap it all up?
Don’t worry! you can do this and still claim ER. This works particularly well where the company has large reserves of cash (or assets that can be quickly turned into cash, or alternatively disposed of to the shareholders).
The solution is to put the company into Members Voluntary Liquidation and the money paid out to you (and your co-shareholders) by way of a Capital Distribution. As long as you qualify for ER, you’ll pay CGT at 10%, which will be considerably less than the rate of tax you’d suffer if you took these funds as wages or dividends – and almost half the standard rate of CGT (18%). The higher rate taxpayers rate is 28%.
So how do you qualify for ER? If you look back at my blog on ceasing in business, I’ve set this out in some detail, but briefly it must be a trading company and you must have held at least 5% of the shares and the voting rights for at least one year. Also, the business must have been owned by you directly, or by a partnership, of which you are a member.
How to claim? When you get your Capital Distribution then you make the claim on your personal tax return.
Downsides? Not that many!
- The company must appoint a liquidator and pay the professional costs
- The company’s trading name of necessity disappears
- It won’t work unless the company is solvent
- The company must have either cash reserves or transferable assets
And finally – you will need professional advice on whether this is the right route for you – so, please, do ask your accountant first!