A capital distribution from a liquidator in a members’ voluntary liquidation is treated as a disposal of your shares, and Business Asset Disposal Relief can apply to it. Because the company normally stops trading when it goes into liquidation, the usual route is section 169I(7) TCGA 1992: you must have met the personal company, officer or employee and trading company conditions for the two years ending with the date the company stopped trading, and each distribution must be made within three years of that date.

Why is an MVL distribution a capital gain and not a dividend?

Section 1030 of the Corporation Tax Act 2010 takes a distribution in respect of share capital in a winding up outside the income distribution rules. Section 122 TCGA 1992 then treats a capital distribution, including one made in the course of winding up a company, as a disposal of an interest in the shares. HMRC confirms at CG64115 that this deemed disposal counts as a disposal of shares for BADR (section 169S(2)), so relief is available on capital distributions in a winding up if the conditions are met.

CG57800 says the date of disposal is the date of receipt of, or entitlement to, the distribution. If the liquidator makes an interim distribution and then a final one, each is a separate part disposal tested on its own date. For the insolvency procedure itself, see members’ voluntary liquidation.

Which conditions must the shareholder meet?

The three share conditions in section 169I(6) are that:

  • the company is your personal company: at least 5% of the ordinary share capital and 5% of the voting rights, and, for disposals from 29 October 2018, an entitlement to at least 5% of distributable profits and assets on a winding up, or to 5% of sale proceeds (CG64050);
  • it is a trading company or the holding company of a trading group; and
  • you are an officer or employee of the company or a group company. CG64110 says there is no minimum for hours or pay.

Shares held jointly, for example by spouses, are split in proportion to each person’s share of the value, so a couple holding 100% equally are each treated as holding 50% (CG64050). Each spouse needs to meet the officer or employee condition personally.

How does the cessation of trade change the test?

HMRC’s Business Income Manual at BIM80570 says a trade normally ceases when a company is put into liquidation, because the liquidator’s role is to wind up its affairs, not to carry on the business. By the time distributions are made the company is usually no longer a trading company, so condition A in section 169I(6), which looks at the two years ending with the disposal, will normally fail.

Condition B in section 169I(7) fills the gap. It is met if the conditions were satisfied throughout the two years ending with the date the company ceased to be a trading company (without becoming or continuing as a member of a trading group), and that date falls within the three years ending with the date of the disposal. In practice you look back two years from cessation and forward three years to each distribution.

Investors’ Relief has an express rule (section 169VV) that a resolution to wind up does not by itself stop a company being a trading company (CG63540). BADR has no equivalent rule; it relies on the three year window.

When does the company actually stop trading?

The cessation date is a question of fact (CG64105). It is not necessarily the date of the winding up resolution. Many owners stop taking new work months before they appoint a liquidator, and BIM80565 says a business ceases when it closes its doors in circumstances that turn out to be permanent, although a decision to wind down does not by itself end a trade if trading continues.

Two problems follow from an early cessation:

  1. The three year window starts earlier than the liquidation, which shortens the time for the final distribution.
  2. If the company sits on cash for a long time after its last contract, or builds up investments, it may stop being a trading company before the trade formally ends. Where the change is gradual CG64105 allows the date to be taken as the end of the accounting period, and the cash test at CG64060 looks at whether funds are kept for trading purposes or simply retained. See what counts as a trading company.

Directors also commonly resign before the liquidation. Under condition B that is not fatal, because the officer or employee condition is tested over the two years ending with cessation, but a resignation earlier than cessation can be.

Illustration only.

Priya owns all the shares in a consultancy company and is its director. She completes her last contract on 31 March 2026 and the company has no further trade. A liquidator is appointed on 1 July 2026 and makes an interim distribution on 1 September 2026 and a final distribution on 1 November 2027. Priya met all the conditions from 31 March 2024 to 31 March 2026, so both distributions fall within the three years ending 31 March 2029. Gains of £400,000 qualify at 18% (for disposals from 6 April 2026), costing £72,000 before her annual exempt amount. If the final distribution were delayed until after 31 March 2029, that part of the gain would be taxed at the main rates.

What else can stop relief on the distributions?

The TAAR. Section 396B of the Income Tax (Trading and Other Income) Act 2005 treats a distribution in a winding up as income if the shareholder had at least a 5% interest, the company was a close company, the shareholder is involved in the same or a similar trade or activity within two years after the distribution, and it is reasonable to assume a main purpose of the winding up was to reduce income tax. Amounts up to the shareholder’s base cost are excluded. If it applies, the payment is a dividend and BADR is irrelevant. See the TAAR on distributions in a winding up.

No formal winding up. If the company is struck off rather than liquidated, distributions made in anticipation of dissolution are only capital under section 1030A CTA 2010 if the total does not exceed £25,000 (CTM36220, CG64115). Above that, the whole amount is an income distribution. See the tax side of closing a limited company.

The lifetime limit. Gains qualifying for BADR on disposals from 11 March 2020 are capped at £1 million over your lifetime (CG64125). Earlier claims count against it.

Can property you own personally qualify at the same time?

Yes, potentially. A capital distribution in the course of winding up is specifically allowed to count as the main disposal for an associated disposal (section 169K(1C)). So if you own the premises the company traded from and sell them as part of withdrawing from the business, that gain may also qualify, subject to the rent restriction in section 169P. See BADR on associated disposals.

How and when is the claim made?

BADR must be claimed by the first anniversary of 31 January following the tax year of the disposal (section 169M(3), CG63970). For a distribution received in 2026 to 2027 the deadline is 31 January 2029. Where the interim and final distributions fall in different tax years, each year’s disposal is claimed in that year’s return.

What mistakes come up?

  • Counting the three years from the liquidator’s appointment rather than from when the company stopped trading.
  • Leaving surplus cash in a dormant company for a year or more before liquidating, which can end trading status early.
  • Assuming a shareholder spouse qualifies without having been an officer or employee.
  • Setting up a similar business soon after the liquidation without considering the TAAR.
  • Choosing strike off for reserves well above £25,000 and expecting capital treatment.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.