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Closing a business so you can retire is a big decision though and one of the most difficult elements of that decision is picking the right time.
It is easy to say you need to be rational about when to close your business. In fact, ‘be rational’ is part of the core message of this article. However, for some people, it will never be an easy decision about the time to close a business. That is because it often isn’t just a cold, logical, and dispassionate, one to make. There can also be a very real, very understandable, emotional aspect to making the choice to go the MVL route and release your assets.
So, before I get all ‘insolvency practitioner professional’ let me acknowledge something as a human being. If you are hesitating in your decision because of your bond with the business. I understand. I get it. Anyone would feel the same way.
The inevitable truth though, is that we all retire at some point. If you are considering retirement and closure of your business via an MVL, the chances are you are near or at that point yourself. Let’s face it, you wouldn’t be considering it otherwise.
Right now, there are some changes in the tax laws and other factors to think about. These matter financially. So, let’s take a quick look at the situation at the moment and briefly touch on what you can expect to happen when you close through a solvent liquidation.
An MVL is a formal procedure for winding up a solvent company, which means the business can close and pay its debts in full. This process allows shareholders to extract remaining assets in a tax-efficient manner, usually by benefiting from capital gains tax (CGT) rates rather than income tax rates. The procedure involves appointing Smart Business Recovery (or another licensed insolvency practitioner) to act as liquidator. We will then oversee the distribution of assets and ensure all legal obligations are met.
To boil that down to a plain English overview. We will ensure your finances are settled, correct, and accurate. Then, once everything is resolved, you will be paid from the resulting money.
There are some clear steps we need to go through, which we discuss in a video on our dedicated pages, where you can also download our .pdf guide and book your free consultation.
So, let’s move on to why timing is important.
Initiating an MVL is a structured process that requires careful planning and time. We are very experienced at this process and will move as fast as possible for you, but some things are out of our hands or simply require time to complete.
As you can see, the following is not going to happen overnight:
This process can take several months, but why does that matter?
The UK's Autumn Budget 2024 introduced notable changes to CGT:
Increased Rates: The lower CGT rate increased from 10% to 18%, and the higher rate from 20% to 24%, effective from 30 October 2024. These adjustments align CGT rates more closely with income tax rates, reducing the tax advantage previously enjoyed on capital gains.
There is no guarantee this will not change. The Chancellor has repeatedly talked about black holes in the coffers and the need to re-fill the treasury. Other changes need to also be considered in your decision.
What that means is an MVL may end up releasing less to the directors than in previous years. Practically speaking, there is no way in advance of our meeting to formally tell you when an MVL process will end. Taking the above into account, it is clearly better, whatever the endpoint ends up being, to start as soon as you are ready.
Business Asset Disposal Relief (BADR): Formerly known as Entrepreneurs' Relief, BADR allows qualifying business disposals to benefit from a reduced CGT rate. The Autumn Budget announced that the current 10% rate will increase to 14% in April 2025 and to 18% from April 2026, diminishing the relief's tax benefits over time.
This is a very similar situation to CGT. That is how it stands now, whether it will change is another matter.
In summary then, these CGT changes have significant implications:
Reduced Tax Efficiency: Higher CGT rates mean that delaying the liquidation of your company could result in a larger tax liability when extracting retained profits.
Diminishing Reliefs: The scheduled increases in BADR rates reduce the tax advantages for qualifying business disposals in the coming years.
I am not saying that if you act today, you will get everything sorted before April, anyone processing your MVL will need to talk to you in detail about your situation before they can even begin to estimate the time scale. However, if you are committed to action then the longer you wait, the more chance there is that things will change in the interim.
As I said at the beginning of the article, there is a personal element as well as a business one to this decision. People often like to retire around specific times of the year. Summer, for example, is frequently top of the list. Whatever your target date to retire is though, speaking both practically and personally, our experience is that the sooner you start down the road, the better.