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After record number of distributions, are solvent liquidations still attractive?
Nicola Layland, Director at Leonard Curtis looks at solvent liquidations and the benefits to SME business owners
By the time Rachel Reeves stood up on 30th October to present her budget, there had been so many leaks of information that the speaker openly criticised the Chancellor for updates given to the media before informing parliament.
Without getting political, some of the leaks painted a worse position than was announced, so that when the inevitable increase in Capital Gains Tax (CGT) was confirmed, it was not as bad as some had feared, an interesting tactic perhaps.
In the lead up to the budget, as speculation increased on CGT increases and potential scrapping of Business Asset Disposal Relief (BADR), demand rose for solvent liquidations to be completed before the budget.
Those who had already intended to retire, or who had sold a business, were seeking to have funds distributed before the budget to lock in the current tax rates.
What is a solvent liquidation?
When most hear the word liquidation, they think of a company ‘going bust’ but there is more than one type of liquidation. Members’ Voluntary Liquidation is a solvent liquidation, where a company has sufficient assets to meet its creditors and return the balance to the shareholders. Those funds are distributed as capital rather than income.
The amounts are therefore taxed at the CGT rate, and there is further relief (BADR) that allows shareholders to pay a reduced level of tax, historically 10%. There is a lifetime allowance of £1m and strict rules around when it applies and therefore specific tax advice should always be taken.
What distributions have been made?
In September, the South Coast office of Leonard Curtis made 47 distributions to shareholders totalling £7.7m. The demand soared and in October, 80 distributions were made, distributing £34.4m, a record month for the office.
Those that received their distributions before 30th October will be taxed at the existing rates at that time, for most paying 10% BADR with some who have used their lifetime allowance paying CGT on their distributions at 20% as a higher rate taxpayer.
What changes were made in the budget to these rates?
So, was the hard work put in by all the team to get the distributions done on time worth it?
An announcement was made that CGT for higher taxpayers would increase from 20% to 24%, interestingly in the speech no date was given. A check at HMRC quickly confirmed that the change was instant, and therefore for those paying CGT receiving their distribution before the budget has resulted in a tax saving.
Unlike CGT a clear timeline was given for BADR which increased for the first time ever. The rate is increasing to 14% from 6th April 2025 and 18% from 6th April 2026.
Is it still worth doing a solvent liquidation and is time of the essence?
For those that are entitled to BADR there is a clear tax saving by receiving a distribution before 6th April 2025. Whist there has been an increase in CGT rates, for most the rate is still lower than if the funds were taken as dividends and therefore a solvent liquidation is still attractive.
Placing a company into solvent liquidation is a big decision, and should not be done for tax purposes alone. Advice should be sought to ensure that a solvent liquidation is right for the company, its directors and shareholders before making that decision. Specialist tax advice should also be sought to ensure that the best option is adopted.
Will March 2025 be as busy as October 2024?
We fully anticipate that whilst there is five months before any rise, there will inevitably be an increase in demand for solvent liquidations in the lead up to the end of the tax year, it is unlikely to be at the same level as October 2024, but time will tell.
We would suggest taking advice at an early stage and we are happy to assist with any solvent liquidations to distribute further funds to what we consider to be hard ‘working people’ (I had to get one political dig in!).
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