With April 2025’s solvent liquidation tax changes fast approaching, business owners must act to maximise their financial benefits when closing solvent companies. Solvent liquidation offers an efficient and tax-advantaged way to dissolve your business, but upcoming legislation will significantly impact its benefits.
This guide will help you understand solvent liquidation, explore its current advantages, outline the changes ahead, and explain why acting now is critical to securing the best outcomes.
What is solvent liquidation?
Solvent liquidation, often referred to as Members Voluntary Liquidation (MVL), is a formal process allowing solvent companies to close in a structured and tax-efficient way. Unlike liquidation processes triggered by insolvency, solvent liquidation is initiated by directors who are confident in the company’s ability to pay all its debts.
This process requires that all outstanding debts be settled before the company’s remaining assets are distributed to shareholders. Importantly, these distributions are treated as capital rather than income, delivering significant tax advantages.
If you’re considering solvent liquidation, the first step is to consult a licensed insolvency practitioner. They can help determine your company’s eligibility and ensure the process is completed correctly and efficiently.
Current tax benefits of solvent liquidation
The primary reason directors choose solvent liquidation is its considerable tax efficiency. Here’s a closer look at the benefits:
Capital Gains Tax: In a solvent liquidation, distributions to shareholders can often be classified as capital instead of income. If you qualify, these distributions are subject to Capital Gains Tax (CGT), which is often much lower than Income Tax rates.
Business Asset Disposal Relief: Directors often qualify for Business Asset Disposal Relief (previously called Entrepreneurs’ Relief). This relief reduces the CGT rate to 10% on qualifying assets, offering significant tax savings compared to dividend income tax rates.
Legally compliant and streamlined closure: The solvent liquidation process is overseen by licensed insolvency practitioners. Their expertise ensures all legal obligations are met, reducing the risk of disputes with HMRC or creditors. This ensures a smooth and legally compliant company closure.
Solvent liquidation tax changes coming in April 2025
From April 2025, the tax advantages tied to solvent liquidation will diminish due to changes in the tax landscape. These changes make it vital for business owners to act promptly.
Increased Business Asset Disposal Relief Rates
- From 6 April 2025, the tax rate on gains eligible for Business Asset Disposal Relief will increase from 10% to 14%.
- From 6 April 2026, this rate will rise further to 18%.
These increases will substantially reduce the financial advantages of solvent liquidation. By completing the process before April 2025, you can maximise your tax savings under the current rates.
Is solvent liquidation the right choice for you?
If your company has retained profits or assets exceeding £25,000, solvent liquidation is often the best option to wind down operations while ensuring financial efficiency. However, you must meet specific legal requirements to proceed:
- Confirm solvency: You must confirm that your company can pay all its debts in full within 12 months of starting the solvent liquidation process. This includes accounting for any future or contingent liabilities.
- Prepare a declaration of solvency: Directors must make a statutory declaration of solvency, confirming they have thoroughly reviewed the company’s financial standing and are confident it can meet all obligations. Fraudulent declarations carry severe penalties, including fines and potential prosecution.
- Secure shareholder approval: Shareholders must formally approve the decision to liquidate the company through a resolution.
Failure to meet these requirements truthfully or accurately can result in legal repercussions. However, if your company qualifies, the current tax benefits of solvent liquidation make it an attractive option for maximising returns.
The solvent liquidation process
A structured approach ensures that solvent liquidation is seamless and legally compliant. Below are the essential steps:
Step 1: Engage a licensed insolvency practitioner: It’s a legal requirement to appoint a licensed insolvency practitioner to oversee the solvent liquidation process. Their expertise early on in the decision-making process ensures you have all the facts before you get started.
Step 2: Prepare a declaration of solvency: Directors must draft and sign a formal declaration confirming the company’s solvency. This critical legal document must be accurate and truthful.
Step 3: Pass a resolution to liquidate: Shareholders must approve the liquidation through a formal resolution, which is then filed with Companies House.
Step 4: Appoint a liquidator: The licensed insolvency practitioner becomes the liquidator, managing the company’s closure. Their responsibilities include selling assets, paying creditors, and distributing any remaining funds to shareholders.
Step 5: Distribute funds and dissolve the company: Once creditors are fully paid, the liquidator distributes any remaining funds to shareholders as capital. The process concludes with a final report filed with Companies House, officially dissolving the company.
Don’t wait to act on solvent liquidation
The 2025 tax changes are fast approaching, reducing the financial advantages of solvent liquidation. Now is the time to determine whether this approach aligns with your company’s needs. Acting promptly allows you to secure the current tax benefits and avoid the higher rates set to take effect.
Speak with a licensed insolvency practitioner today to explore your options and start the process of solvent liquidation. Early action ensures you’ll maximise your savings and close your company in the most efficient way possible.
