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Limited company FAQs for contractors, business owners and entrepreneurs
What was widely known as ‘Entrepreneurs’ Relief’, or ER, actually became ‘Business Asset Disposal Relief’ (BADR), for the 2020/21 tax year onwards. The rules of the relief did not change with the name in March 2020 and so when you hear either expression here’s what is meant from the perspective of a limited company.
Business Asset Disposal Relief reduces the amount of Capital Gains Tax (CGT) on the disposal of qualifying assets as long as certain conditions have been met through a 2 - year qualifying period either up to the date of disposal or the date the business ceased. Amongst others, the relief is available to individuals who are looking to close the limited company through which they have been trading. If a limited company diector has decided to close their company, perhaps in favour of a permanent position or has retired and has no further use for a limited company, they should take a close look at whether they may benefit from this relief.
Providing that the individual has been a director and effectively has ownership of at least 5% of the shares in a company, which has been trading for 2 or more years, then they are likely to be eligible. If you’re in doubt about how your personal circumstances may affect how much Capital Gains Tax you’ll be liable to pay, drop an email to our tax experts: email@example.com
When a limited company is closed, either through an administrative closure or by way of formal liquidation, the remaining assets in it (usually cash for a limited company) are distributed to the shareholders. Normally limited company distributions are taxed as income dividends in the hands of the shareholders but in closure cases they can be regarded as being capital distributions.
This means that instead of being taxed as income (usually as the top slice of an individual’s income), they can be taxed under the more favourable Capital Gains Tax rules.
A capital gain is calculated by deducting the purchase price of the asset from its sale proceeds. In limited company closure cases with a single shareholder, this means simply deducting the cost of the share(s), often 1 share at £1, from the distributed proceeds.
At PayStream we have many years’ experience in helping contractors, business owners and entrepreneurs who are considering closing their company. Please contact firstname.lastname@example.org for more information.
The immediate advantage of treating a distribution from the company as capital is that, subject to the shareholder having no other capital gains in the year, he/she is entitled to an Annual Exemption (for the 2022/23 tax year), of £6,000 before any tax is charged.
So, if the remaining cash in a limited company is say £20,000 and the share cost £1, a capital gain of £19,999 would arise but using the Annual Exemption of £6,000 would bring that taxable gain down to £13,999.
This is where things can get a little more complicated. How much CGT you’ll pay will depend upon your rate of income tax liability and the size of the capital gain– if the gain is included and you’re still within the basic rate tax band, then you’ll pay tax at 10% on the gain. If the gain takes you into the higher income tax bracket, you’ll pay 20% on any of the gain above the basic rate tax band.
However, if you are entitled to BADR you will only pay tax at 10% on the whole of your gain after the Annual Exemption, subject to a lifetime allowance of £1m.
On the face of it the relief is a simple one but as ever, an individual’s personal circumstances can affect any decision to claim the relief. There are a number of different scenarios which can arise which make claiming the relief more problematic.
At PayStream we have many years’ experience in helping contractors, business owners and entrepreneurs who are considering closing their company, decide which is the most beneficial route for them. Please contact email@example.com for more information.