Here, our simple guide summarises the elements that are likely to be relevant to contractors, consultants and freelancers working through their own limited companies.
Previously known as Entrepreneurs relief (prior to 6th April 2020), business asset disposal relief is an allowance that can reduce the rate of capital gains tax to an effective rate of 10% when businesses, and other qualifying assets, are disposed of.
When selling either part of, or all of your business, in order to qualify for the relief, you must be either a sole trader or business partner for at least two years to the date of sale, and you must have owned the business for at least two years.
The same applies to the cessation of trade and winding up of a limited company under certain circumstances. Your business assets must also be disposed of within three years.
For the business asset disposal relief to apply, the following conditions need to be met:
- The reasons for stopping to trade through the limited company must be for genuine commercial reasons.
- The company should be a trading company in the twelve months prior to disposal. If the company stops trading, you can still qualify for relief if you dispose of your shares within 3 years.
- The shareholder claiming the relief must have held 5% or more of the share capital of the company for a minimum of 24 months and those shares must bring with them at least 5% of the voting rights (any additional shares acquired over the 5% within the final 12 months are still eligible).
- The shares must have been owned for a minimum of 24 months.
- The shareholder claiming the relief must also be an employee or officer of the company and must have been so for a minimum of 24 months.
A limited company with distributable reserves of £25,000 or less can be wound up informally by application to Companies House. However, for companies with remaining distributable reserves greater than £25,000, it is necessary to appoint an insolvency practitioner to formally liquidate the company via a members’ voluntary liquidation (MVL).
Business asset disposal relief can also be available when disposing of other assets, including furnished holiday and shares acquired through Enterprise Management Incentive schemes.
If you are a client of Integro Accounting your accountant will be able to guide you through the MVL process and introduce you to a licensed insolvency practitioner who can complete the liquidation for you.