Are you thinking of selling or winding down a company? Important tax changes are coming that will affect how much money you keep when you sell or close your business. 

The Autumn Budget 2024 announced increases to Business Asset Disposal Relief (BADR) tax rates that exit-minded business owners need to understand, as they involve tax rises. 

Our expert tax specialists have broken down these changes, explaining the new rates and their consequences to help you plan when and how to exit your business in the most tax-efficient way.

The current situation

Right now, Business Asset Disposal Relief (which used to be called Entrepreneurs’ Relief) helps business owners save money on tax when they sell or close their business. 

Instead of paying the normal Capital Gains Tax rates of 18% or 24%, you only pay 10% on the first £1 million. This means business owners stand to save a considerable amount of money when they exit their business.

The coming changes

When you sell or close your business, the amount of tax you’ll pay on the money you receive is going to increase in stages:

  • If you sell/close now until 5 April 2025: You’ll pay 10% tax on the money you get.
  • If you sell/close between 6 April 2025 – 5 April 2026: You’ll pay 14% tax.
  • If you sell/close from 6 April 2026 onwards: You’ll pay 18% tax.

Examples of these changes in action

Let’s put this increase into real terms by showing 3 examples of how much these increases could mean you’d pay if you were planning to sell your business.

If you sold your business for £500,000:

Selling now: You’d pay £50,000 in tax

Selling after April 2025: You’d pay £70,000 in tax

Selling after April 2026: You’d pay £90,000 in tax

Remember – this special tax rate only applies to the first £1 million you make from selling or closing your business. Anything above that would be taxed at the normal Capital Gains Tax rates.

Closing your business through an MVL

If you’re planning to close your business rather than sell it, a Members Voluntary Liquidation (MVL) could still be a tax-efficient way to take money out of your business, even with the new BADR rates coming in.

Let’s say you have £100,000 in your business that you want to take out. This is how it compares to taking it out as dividends.

Taking it as dividends

You could pay up to £39,350 in tax (at the highest dividend tax rate of 39.35%).

Using an MVL with BADR

From now until April 2025: You’d pay £10,000 in tax (10% rate).

April 2025 – April 2026: You’d pay £14,000 in tax (14% rate).

After April 2026: You’d pay £18,000 in tax (18% rate).

Even with the increased BADR rates, using an MVL could still save you significant money compared to taking the money as dividends:

Using an MVL after April 2026 (at 18% tax) vs dividends (at 39.35% tax) could save you over £21,000 on £100,000. This is a significant saving, especially if you’re winding down your business and want to extract as much residual value as possible.

How do you qualify for BADR?

There are some stipulations on who can use BADR. 

To qualify, you must:

  • Own at least 5% of the company’s ordinary shares
  • Be able to vote on company matters
  • Work in the business as a director or employee
  • Have met these conditions for at least two years before selling or closing

Most of these conditions should usually be easily met by yourself if you are in the position to make a decision to wind down the business. The key item to check is whether you meet the 2 year time frame criteria. 

Are there any other rules for using MVL & BADR?

As you can imagine, HMRC has some rules for you to take into consideration if you wish to use BADR in order to prevent misuse of these tax benefits. Here are the key 2 to bear in mind.

1. The Phoenix Rule 

    What is the Phoenix Rule?

    This stops businesses from closing down and starting up again just to pay less tax. The Phoenix Rule prevents you from closing your business and starting a similar one within two years. This applies whether you start up as a company, sole trader, or partnership

    Note: If you break this rule, you’ll have to pay the higher tax rate after all (up to 39.35%).

    Example: If you close down your plumbing business through an MVL but start another plumbing business 18 months later, you’ll end up paying the higher tax rate.

    2. Moneyboxing

      What is Moneyboxing?

      This is when business owners keep more money in the company than it needs, just to pay less tax later. HMRC looks closely at this because it suggests you’re keeping more money in the business than you need to and could look as though you’re trying to avoid paying income tax on salary or dividends.

      What they frown on here is if it looks like you’re just storing up money in the business with no real business purpose, waiting to close the company through an MVL just to pay less tax (i.e. 10% with BADR instead of 39.35% on dividends).

      We’ll help you plan your best case business exit

      Even with these tax increases, there are still ways to save money when you sell or close your business – but you’ll need to plan carefully and act at the right time. The key is understanding how these changes affect your specific situation and mapping out what options you have.

      Need help working out the best time to sell or close your business under these new rules? Our team of specialist tax accountants can help you figure out your best options, provide professional business valuations, and make sure you’re not paying more tax than you need to.Contact Williamson & Croft to secure a compliant business exit strategy that maximises your tax relief.