Capital Gains Tax relief: Time to extract wealth from your limited company?

If you have recently sold your business and are left with cash at bank, or you are planning to cease trading, due to retirement or because the business of the company has run its course, it is important to consider how to extract your money in the most tax-efficient way.

With Labour's first budget looming, timing may be key to ensure you benefit from the tax reliefs currently available in order to reduce your Capital Gains Tax (CGT).

How to benefit from CGT relief

If there is more than £25,000 in the company then the best way to extract this money is by taking the following steps:

• Placing the company into a Members Voluntary Liquidation (MVL). This is a solvent liquidation so there is no investigation into the directors’ conduct
• Distribute the company funds by way of capital distribution
• If possible claim Business Asset Disposal Relief (previously known as Entrepreneurs Relief). This qualifies the shareholder to apply a tax rate of 10%, far less than the tax rate that would be applied if funds were extracted as income, via a salary or dividends.

Key considerations before an MVL

Be aware of anti-avoidance rules. In order to stop the MVL procedure being misused as a means of distributing company profits, the distribution will be reclassified as dividends and subject to income tax, if all the following conditions are met:

• The company is “close” – a close company is one controlled by a small group of people
• The shareholder owns at least 5% interest in the company
• Within two years of the distribution the shareholder continues to be involved in a similar trade or activity
• The arrangement has as one of its main purposes the obtaining of a tax advantage

You must have a true belief that the company is solvent. The directors, who are often the shareholders as well, have to swear a Declaration of Solvency prior to the MVL. This statutory declaration should only be signed after a thorough examination of the company’s assets and liabilities has been undertaken, and it has been concluded that all its debts, together with interest at the official rate, can be paid within no more than 12 months from the commencement of the winding up. It is a criminal offence to make a Declaration of Solvency without reasonable grounds.

Directors must identify all liabilities, including long-term liabilities such as leases. Also, contingent liabilities must be included, such as dilapidations on property leases. Other liabilities may not feature on the latest accounts, such as amounts due to employees for redundancy, holiday pay and pay in lieu of notice.

Not all assets may be in the form of cash at bank at the time of swearing the Declaration of Solvency. If there are trade debtors, directors must be realistic in estimating which debts are collectable within 12 months. Similarly, a major asset may be a property. Professional advice should be sought on the likely value of such an asset, and the time it may take to complete a sale.

Timing could be key

Extracting value from a company at the best tax rates is worth the due diligence that shareholders/directors must undertake before deciding to go down the MVL route. The uncertainty ahead of the Autumn Budget means that it may be wise to act quickly to take advantage of current tax legislation.

Experts from Armstrong Watson’s accounting, tax and financial planning teams will be discussing the budget announcements in a live webinar on October 31.