Recovery matters: don’t delay, help your clients wind up now

27 January 2021 / Insight posted in Article

If you are advising a client who may need to close their business and the shareholders draw out its hard-earned reserves, you may want to do this urgently to ensure you don’t lose any tax breaks that may disappear in the Chancellor’s Budget on 3 March 2021.

You may recall that business asset disposal relief (previously called entrepreneurs’ relief) allows owners to draw funds out of their business as capital and pay 10% tax. This is a lower rate than the current level of capital gains tax (20%) and far lower than the rate of dividend or income tax, should you draw the money out as income. To achieve this, you need to place the company into members’ voluntary liquidation so that the distributions made after liquidation are treated as capital and not income.

While we recommend taking tax advice, in summary, this relief is available for up to a lifetime amount of £1 million if:

  • The company ceased trading within three years
  • Your client holds more than a 5% shareholding and has done for at least two years
  • Your client has been a director for at least two years
  • Your client doesn’t re-invest the monies into a similar business within two years of any distribution.

Of course many businesses are hibernating while the pandemic continues and their future viability may be uncertain. It is wise to consider whether your clients should cease trading now and benefit from this tax break, or risk losing their business because of future losses, or just missing the boat and ending up paying far higher tax.

I would be pleased to discuss the options with you or your clients.