What Is Capital Gains Tax & How Can An MVL Help?
As a business owner, you may be familiar with the term Capital Gains Tax in discussions around property, investments and transactions. For many, Capital Gains Tax is broadly understood as an unwelcome expense that reduces the profits received from any sale or disposal of assets. However, a more detailed understanding of exactly what Capital Gains Tax is and how it may be altered by processes such as Members Voluntary Liquidation (MVL) can reshape the way you factor it into your financial planning, particularly if you are a business owner starting to consider winding down your company in the most tax-efficient way possible.
What Is Capital Gains Tax?
Simply put, Capital Gains Tax is a tax charged on the profit you make when disposing of assets. It applies particularly to assets that may have increased in value over time, like property or shares. You are not liable to pay tax on the entire value of that asset, but rather on the gain that you have made. For example, if your business premises were bought for £100,000 and then sold or disposed of when it is worth £150,000, you would be liable to pay Capital Gains Tax on the £50,000 gained.
The rate at which you pay Capital Gains Tax depends on several factors, typically your overall income and the type of asset. Assets which may be subject to Capital Gains tax include:
- Personal possessions valued at more than £6,000 (not including your car)
- Property that is not your main home
- Some types of shares
- Business assets
When Is Capital Gains Tax Paid?
Capital Gains Tax only becomes relevant when you dispose of an asset. Asset disposal can take a number of forms, including selling it, giving it away as a gift, transferring it to someone else, swapping it, or receiving compensation for it. You are not charged Capital Gains Tax while the asset increases in value but is still in your possession. However, should any of these instances take place the tax is then applicable.
There are also a number of exceptions and instances where your Capital Gains Tax liability may be different to the norm. The most notable of these is the annual tax-free allowance, which stands at £3,000 for the current tax year (2024/2025). Additionally, there are a range of reliefs including Business Asset Disposal Relief which can reduce the rate of Capital Gains Tax charged on qualifying assets.
Members Voluntary Liquidation & Capital Gains Tax
A Members Voluntary Liquidation is a process used by solvent companies to formally wind up their affairs. It is typically utilised when business owners want to retire, the company has outlived its purpose, or the owners wish to extract assets in a tax-efficient manner. In all of these circumstances, Capital Gains Tax will usually apply as the business is likely to have accrued assets which have increased in value over time.
By utilising an MVL, business owners can extract these assets from a company in the form of capital distributions rather than income. This is significant because it means that the funds extracted will be taxed under Capital Gains Tax rates rather than income tax, which usually results in a lower tax liability.
Business Asset Disposal Relief
Given that the MVL process allows assets to be disposed of at Capital Gains Tax rates rather than income tax rates, it is generally viewed as a favourable option by those wishing to minimise their tax liability when closing a business.
In addition, business owners extracting assets via an MVL may also be eligible for Business Asset Disposal Relief. Formerly known as Entrepreneurs Relief, this is a form of tax relief that will reduce the rate of Capital Gains Tax charged on distribution to 10% and therefore further minimise the tax liability of those eligible.
Next Steps For Businesses
Knowing when Capital Gains Tax may come into play is key to making informed financial decisions and minimising the amount of tax you pay on your hard-earned wealth. If you are considering winding up your company then utilising the MVL process may be a suitable way to leverage tax reliefs available on capital gains.
To get a better understanding of whether an MVL is an appropriate way for your business to manage its Capital Gains Tax, you should always consult a professional. At My Liquidation, our licensed insolvency practitioners have years of experience talking owners of solvent business owners through their options. We can help you understand if an MVL is suitable for you, and assist with the process of extracting your assets in the most tax-efficient way possible. Get in touch today to find out more.
