Impact of the Autumn Budget 2024
The government has announced that the Autumn Budget 2024 will be delivered by Chancellor of the Exchequer Rachel Reeves on Wednesday 30 October 2024.
The first Budget from the new Labour government is anticipated to announce some substantial tax-related changes and introduce ambitious plans for economic growth as well as outlining which cuts will be necessary in order to reduce a £22bn shortfall in the government’s bank balance.
Closer to home (or work in our case), the government may adjust the Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) currently available and rates of Capital Gains Tax, both of which may affect the future of Members Voluntary Liquidations (MVLs). MVLs are a practical and tax-efficient means of winding up a solvent company, commonly used when a company has achieved its objectives or is no longer needed.
In light of these potential changes we anticipate seeing an increase in businesses looking to put an MVL in place before the end of October. Here, we provide a summary of the impact of the possible changes.
How might MVLs be affected?
Business Asset Disposal Relief (BADR) changes
Reduction in Relief or Abolishment: If the government reduces the relief or abolishes it altogether, individuals undergoing an MVL could face higher tax liabilities on the disposal of their business assets. Currently, BADR allows qualifying business owners to pay a reduced CGT rate (10%) on gains up to a lifetime limit (£1 million as of now). Without this relief, the gains from an MVL could be taxed at standard CGT rates, which are generally higher.
Business owners might rush to initiate MVLs before the changes take effect to lock in the more favourable tax treatment. Conversely, if the changes are retrospective or immediate, this could lead to a slowdown in MVLs as the tax advantages diminish (though we believe this is unlikely).
Capital Gains Tax (CGT) Rate Increases
Higher CGT Rates: If the CGT rates are increased (for instance, aligning them closer to income tax rates), the tax burden on the gains realised during an MVL would increase. This would reduce the net proceeds available to shareholders after liquidation.
Effect on Business Exits and Retirement Planning
Alteration in Exit Strategies: Higher tax liabilities from reduced BADR or increased CGT rates could lead business owners to reconsider or delay their exit strategies. Businesses may wish to explore alternative methods of extracting value from their businesses, such as through dividends or other forms of remuneration, rather than liquidation.
Retirement Planning: Many business owners use MVLs as a means of realising the value of their business as part of their retirement planning. Changes to the tax treatment of gains could necessitate a revaluation of retirement plans, potentially leading to earlier or later exits depending on the timing of tax changes.
In summary, any changes to BADR and CGT in the Autumn Budget 2024 could significantly affect the financial outcomes of MVLs, influencing both the timing and desirability of using this method to extract value from a business. Business owners should keep a close eye on the Budget announcements and seek timely advice to mitigate potential impacts.
Further information on what an MVL involves can be found here: https://www.brettsbr.co.uk/members-voluntary-liquidations-mvls-understanding-their-purpose-and-suitability/
Please get in touch with us today, if you would like to discuss the potential of putting in place an MVL or for more options on tax efficient ways of closing a business.