Did you know that from 6 April 2026, the Capital Gains Tax rate under Business Asset Disposal Relief will rise from 14% to 18% for qualifying distributions when winding up a limited company, potentially adding thousands to the tax bill for contractors with retained profits? With careful timing and the right approach, many can still secure the lower 14% rate or minimise liabilities effectively before the change takes full effect.
Key Areas We Will Cover
- The upcoming 2026 CGT rate increase under Business Asset Disposal Relief and its impact on contractors
- Common ways contractors wind up limited companies and associated tax implications
- Qualifying for Business Asset Disposal Relief before the rate rises
- Strategies to avoid or reduce higher CGT when exiting
- Members’ Voluntary Liquidation versus strike-off and key differences
- Anti-avoidance rules and compliance considerations
- How Futurelink Group assists with compliant payroll transitions and exit planning
Introduction
For UK contractors operating through limited companies, winding up the business represents a major decision, often driven by retirement, IR35 pressures, career shifts, or simply reaching the end of a contracting phase. In 2026, a key concern is the scheduled increase in the Capital Gains Tax rate under Business Asset Disposal Relief from 14% to 18% for qualifying disposals on or after 6 April 2026, which can significantly raise the tax burden on retained profits distributed as capital. This guide explains the process, highlights tax-efficient options, and outlines steps to minimise higher CGT exposure while ensuring full compliance.
Understanding the 2026 CGT Rate Increase and Its Impact
The Autumn Budget 2024 confirmed the gradual rise in CGT rates under Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief.
- For qualifying disposals from 6 April 2025 to 5 April 2026, the rate is 14%.
- From 6 April 2026, it increases to 18%.
- Standard CGT rates (without BADR) are 18% for basic-rate and 24% for higher-rate taxpayers on most assets. For contractors with accumulated profits, this 4% rise means higher tax on capital distributions during winding up, making pre-April 2026 action potentially advantageous if distributions qualify for BADR.
Common Ways Contractors Wind Up a Limited Company
Contractors typically choose between an informal strike-off or a formal liquidation, depending on retained profits and circumstances.
- Voluntary strike-off suits dormant companies with minimal assets; simple and low-cost but distributions over £25,000 risk income tax treatment.
- Members’ Voluntary Liquidation (MVL) involves appointing a licensed insolvency practitioner for solvent companies; distributions are treated as capital gains, often qualifying for BADR.
- Distributions as dividends attract higher income tax rates (up to 39.35% for additional-rate taxpayers), making capital treatment preferable.
Qualifying for Business Asset Disposal Relief Before the Rate Rise
BADR reduces CGT on qualifying gains up to a £1 million lifetime limit.
- Eligibility requires at least 5% ownership of shares and voting rights, plus officer/employee status for two years before disposal.
- The company must be a trading business (not investment-focused) during that period.
- For winding up, distributions must occur as capital; MVL ensures this treatment.
- Anti-phoenixing rules (TAAR) prevent reclassifying gains as income if a similar trade restarts within two years. Acting before 6 April 2026 allows the 14% rate on qualifying gains if distributions are completed in time.
Strategies to Avoid or Reduce Higher CGT
Timing and structure are crucial to minimise the impact of the 18% rate.
- Complete qualifying distributions before 6 April 2026 to lock in the 14% BADR rate.
- Use MVL for larger retained profits to secure capital treatment and BADR eligibility.
- Sequence distributions to utilise annual CGT exemptions (£3,000 in 2025/26) across tax years if possible.
- Explore pension contributions or other reliefs before exit to reduce taxable gains.
- Avoid informal routes if profits exceed £25,000 to prevent income tax reclassification.
Members’ Voluntary Liquidation: The Preferred Route for Tax Efficiency
MVL offers the most reliable path to capital treatment and BADR.
- Requires a declaration of solvency from directors.
- A licensed practitioner handles asset realisation and distributions.
- Gains qualify for BADR if conditions met, taxed at 14% pre-April 2026.
- Costs are offset by tax savings on larger sums compared to dividend extraction.
Anti-Avoidance Rules and Compliance Essentials
HMRC’s Targeted Anti-Avoidance Rule prevents abuse by reclassifying capital distributions as income if the main purpose is tax reduction and a similar activity resumes within two years.
- Document genuine reasons for winding up (e.g., retirement, career change).
- Maintain accurate records of trading activity and ownership periods.
- Seek specialist advice to ensure compliance and avoid penalties.
Conclusion
Winding up a limited company as a contractor in 2026 requires careful planning to navigate the rising CGT rate under Business Asset Disposal Relief and secure the most tax-efficient outcome. By qualifying for BADR before the 18% increase, choosing appropriate methods like Members’ Voluntary Liquidation, and adhering to anti-avoidance rules, many can substantially reduce liabilities. Early preparation and professional guidance ensure a compliant, cost-effective exit while protecting accumulated profits.
Get Started Today
Considering winding up your limited company in 2026? Contact Futurelink Group for expert advice on compliant payroll transitions, exit planning, and tax-efficient solutions tailored for contractors. Call us on +44 (0) 1923 277900 or email sales@futurelinkgroup.co.uk
Frequently Asked Questions About Contractor Company Exit and CGT in 2026
These common questions help contractors understand winding-up options and CGT implications, based on current HMRC guidance and 2026 changes.
It increases to 18% for qualifying disposals on or after 6 April 2026, up from 14% in the prior year.
Yes, if eligibility conditions are met (e.g., two-year ownership, trading company status); the lifetime limit remains £1 million.
Completing qualifying distributions before 6 April 2026 can secure the 14% rate, but plan carefully to meet all requirements.
Distributions may be treated as income unless using MVL; capital treatment via liquidation often proves more efficient.
We provide compliant payroll support during transitions, guidance on tax-efficient structures, and connections to specialists for winding-up processes.
Craig Moss
Craig Moss is a seasoned professional in the employment and recruitment industries, based in Kings Langley, UK. With over 30 years of experience, including a successful tenure as a central London realtor handling properties up to £3 million, he now leads an exciting management role at Futurelink Group. Specialising in compliant payroll solutions for contract recruitment, Craig helps clients increase margins by up to 30% while navigating complex legislation. His people-focused approach, honed through decades in sales and people management, ensures both recruiters and workers benefit from tax-efficient, compliant solutions. Passionate about building strong relationships, Craig thrives on delivering results that drive business success.
