Business Asset Disposal Relief (BADR) and MVLs

Business Asset Disposal Relief (BADR) is a government relief scheme that can lower the rate of Capital Gains Tax you pay when you close your company through a Members’ Voluntary Liquidation.

When you close a solvent company with an MVL, the money you take out is treated as capital and therefore taxed under Capital Gains Tax rules rather than as income.

If you qualify for BADR, however, the rate on your qualifying gains is reduced further still.

Business Asset Disposal Relief lowers the rate of Capital Gains Tax reduced down to a flat 18% on qualifying gains, up to a £1 million lifetime limit.

That £1 million is a lifetime allowance, not a yearly one, and it covers the total of all the qualifying gains you claim Business Asset Disposal Relief on across your lifetime. Gains above the limit are taxed at the standard Capital Gains Tax rate.

Business Asset Disposal Relief isn’t automatic. In order to qualify, you need to meet all of the following conditions:

• You hold at least 5% of the company’s ordinary shares and voting rights making it your “personal company”
• You’re a director or employee of the company
• The company is, or was, a trading company rather than an investment company
• You’ve met these conditions for at least two years before the disposal

Because your company will have stopped trading by the time it’s placed into an MVL, there’s one more timing point to watch, and that is that the capital distribution generally needs to happen within three years of the company ceasing to trade.

If you’re not certain whether you qualify, our expert advisers can help talk you through the criteria.

The rate of Business Asset Disposal Relief has changed in recent years and now sits at 18%. When compared against the standard Capital Gains Tax rate of 24% for higher-rate taxpayers, the savings that can be made can be significant.

On a £100,000 qualifying gain, for example, applying Business Asset Disposal Relief would mean paying roughly £18,000 in tax rather than around £24,000 at the standard Capital Gains Tax rate, a saving of about £6,000.

For those individuals that don’t qualify for Business Asset Disposal Relief, or if they have already reached the £1 million lifetime limit, closing a company via an MVL still represents a tax-efficient and cost-effective closure method as all distributions are treated as capital, rather than income.

Questions surrounding Business Asset Disposal Relief are some of the main concerns directors come to us with. If you’re weighing up a Members’ Voluntary Liquidation against simply striking the company off, our advisers are here to help ensure you choose the right path for you and your circumstances.

If your company’s affairs are simple and straightforward and an MVL looks like the right route, we are happy to provide a fixed-fee quote with absolutely no obligation to proceed.