When the time comes to move on to a well-deserved retirement, many business owners choose to close and liquidate their firms rather than face the potentially-daunting prospect of marketing it for sale – in fact some professional advisors actually recommend this. But recent changes introduced by HMRC mean that this can be a hugely costly exercise in more ways than one…

This approach – known as ‘solvent liquidation’ – previously only saw incurred costs around redundancies and contract terminations, plus significant professional fees of course, but despite these, it has historically been a reasonably tax-efficient exit strategy. However, changes to the company distribution legislation and the way that dividends are taxed mean that from 6th April 2016 distributions from a solvent liquidation will be treated as income and not as capital.

And that means that the entire proceeds of any liquidation will attract full income tax right through to 40%. Business owners who consider a sale instead though, can qualify for entrepreneurs’ relief which brings the tax rate right down to a much more manageable 10%.