Many of our clients operate their own limited companies for private medical practice, locum work, or out-of-hours services. As with all ventures, there often comes a time to wind things down. If you are considering closing your company, you need to be aware of a recent tax rule change, along with additional adjustments on the horizon, that may impact your exit plans.
We regularly help clients withdraw funds from their companies in the most tax-efficient way possible. However, even with careful planning, some residual funds often remain at the point of closure. One valuable tax relief that has historically helped in these situations is Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief. This can offer significant tax savings when disposing of shares or business assets, provided the criteria are met.
Understanding Business Asset Disposal Relief (BADR)
BADR is a valuable provision within the UK tax system designed to reduce the Capital Gains Tax (CGT) liability upon the disposal of qualifying business assets, including shares. Previously, qualifying gains were taxed at a reduced rate of 10%, subject to a lifetime limit of £1 million. This offers a considerable advantage compared to prevailing CGT rates, which, as of October 2024, stand at 24% for higher-rate taxpayers.
Forthcoming changes to BADR tax rates
However, significant alterations to the BADR tax rate are scheduled for the coming financial years:
- From 6 April 2025: The BADR tax rate will increase from the current 10% to 14%.
- From 6 April 2026: A further increase will see the BADR tax rate rise to 18%.
Practical implications of the rate changes
To illustrate the impact of these changes, consider the disposal of shares resulting in a £1 million qualifying gain:
- Current position (pre-6 April 2025): The CGT liability under BADR would be £100,000 (10% of £1 million).
- Post 6 April 2025: The CGT liability on the same gain would increase to £140,000 (14% of £1 million).
- Post 6 April 2026: The CGT liability would further rise to £180,000 (18% of £1 million).
While the revised BADR rates remain lower than the standard higher-rate CGT of 24% (which would result in a £240,000 liability on a £1 million gain), the tax savings afforded by BADR will be progressively diminished.
In light of these changes, many company owners may choose to reassess their exit strategy. While still advantageous compared to standard Capital Gains Tax, these increases make other withdrawal methods, such as dividends at the basic rate tax level of 8.75%, a potentially more tax-efficient alternative for some business owners. However, if the person taking the dividend is either a higher-rate taxpayer (33.75%) or an additional-rate taxpayer (39.35%), this tax saving disappears.
Strategic exit considerations
In light of these changes, many company owners may choose to reassess their exit strategy:
- Extracting funds through dividends at basic rate tax levels may remain a favourable approach.
- Choose to leave the company open, gradually withdrawing funds over time rather than opting for immediate closure.
- Consider making disposals before April 2026, avoiding the increased tax rate on BADR.
With these changes taking effect, reviewing business exit strategies and tax planning options becomes increasingly important. Make sure you take specialist financial and accounting advice if you are contemplating exiting your Limited Company.
Early planning and timely action can make a significant difference in mitigating potential increases in your tax liability.
Tax is dependent on your own circumstances and personal situation, and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation.
This article was written in collaboration by Max Spurgeon and Kirsty McGaun.