Tax-efficient capital gains continue to take a hit - act now to maximise the benefit

Restructuring and Insolvency

Despite the fact that Capital Gains Tax (CGT) generates only a small amount for the Treasury when compared with Income Tax and Corporation Tax, it has for some time been in the crosshairs of various Chancellors (we had four in 2022 alone!) as the government tries to balance the books following the covid pandemic.

There have for a number of years been concerns that the lower CGT rates encourage individuals to structure their finances in a way that minimises tax by having gains treated as capital rather than income.  As a result, it was feared that previous Budgets would seek to level the playing field through a combination of increasing CGT rates and reducing allowances or removing them altogether.

Prior to current Chancellor Jeremy Huntes first Autumn Statement back in November last year, there was an expectation that CGT would again be targeted.  However, the outcome was that CGT was not hit as hard as it could have been.  To summarise:

  • CGT rates remained unchanged
  • But the Annual Exempt Amount currently £12,300 will reduce to £6,000 in 2023-24 and fall again to just £3,000 in 2024-25

So what does this mean?

The impact of this change is that any individual making a capital gain on the sale of shares will pay more tax if the sale is made in the next tax year rather than if it is made before 6th April 2023 £1,260 more to be exact and £1,860 if the sale is made in 2024-25.

And what does it have to do with a Members Voluntary Liquidation?

At Leonard Curtis, we work with many business owners who want to close a company via a solvent, Members Voluntary Liquidation (MVL) because, under tax legislation, distributions of cash and other assets made by a Liquidator in an MVL are generally treated as capital rather than income and therefore benefit from lower tax rates.  Capital Gains can be further reduced where Business Asset Disposal Relief (the successor to Entrepreneurs Relief) applies.

As it stands, even though the CGT allowance will fall over the next two years, the difference in tax rates when treating gains as capital rather than income mean that extracting value from a business via an MVL is still a tax-efficient strategy.

Every little helps…

So, if any of your clients are considering a solvent liquidation in order to realise value from a company at the end of its useful life on the basis of more attractive CGT rates, then it may be advisable to act sooner rather than later.

For some, saving £1,000 or so may be marginal in the grand scheme of things, but for many SME business owners ites still a significant sum.  And, in a time of rising costs of living, then any additional tax saving that can be secured is well worth considering.

Who could benefit from an MVL?

In the SME arena where Leonard Curtis operates we tend to work with accountants and their business owner clients who are retiring or have sold the business through the limited company.  Ites also an effective way to wind up businesses set up for a specific project that has been completed, when the profits and accumulated reserves must be extracted from the company by its shareholders.

MVLs also remain a popular route for those accountants whose freelance contractor clients wish to wind up their personal service companies as a result of the changes to IR35.  As a reminder, despite almost being repealed in former Chancellor Kwasi Kwartenges Mini Budget last September, the proposed changes will still go ahead making it less attractive for many contractors to operate through their own companies.

Adding value and expertise

Whilst many MVLs can be quite straightforward, there can be a number of complicating factors.  This is why it is important to take specialist advice before beginning the process.  At Leonard Curtis, the specialist MVL team works in partnership with accountants to ensure that the best possible solution is secured for their clients.

For those MVLs where it is simply an extraction of cash from a shell and no pre-appointment advice is required, weve seen lots of accountants using our My-MVL platform to allow them to promote, manage and control cash MVLs through our simple online system.

The many accountants that have registered to use it do so because they are able to charge a fee for the work they undertake e.g. tax advice and information provision while quoting a clear overall fee to their client as the use of the software is covered by a single fixed fee.

Further changes to come?

We now know that the next Budget will be on 15th March.  It is unclear whether the Chancellor will make further changes to his proposals from last November but there is always a risk that he could tweak the tax regime once more.

So if you have any clients who would like some advice especially if they are considering triggering a capital gain in the current tax year then they havent got long.  


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