What-tax-do-I-have-to-pay-when-closing-my-company

How can I close my company in the most tax-efficient way?

If you are contemplating the closure of your limited company for any reason, it is natural to seek the most tax-efficient method. Fortunately, there are established procedures and tax reliefs to assist you in minimising your tax liability. 

 

How can I close my limited company?

Choosing to close your limited company is not always a straightforward decision. However, if you are certain you won’t require the company in the future and the business is financially sound (capable of settling all debts), there are two options for closure – Voluntary Strike-Off or a Members’ Voluntary Liquidation (MVL).

Identifying the most tax-efficient method for closure will enable you to extract the maximum value from your company, providing a lump sum that can set you up for the future.

If your company is insolvent (unable to settle its debts), these closure methods are not applicable. Instead, you will need to arrange a Creditors’ Voluntary Liquidation (CVL).

 

What is Voluntary Strike-Off?

Voluntary Strike-Off, also referred to as Dissolution, stands out as the most economical and straightforward method to close a limited company. To initiate this process, you submit an application to Companies House, requesting the removal of your company from the register. This can be done either online or by sending the completed form DS01 to Companies House. The associated cost for the process is no more than £10, and if your company meets specific conditions, it will be removed from the register, ceasing to exist.

For eligibility in strike-off, your company must:

  • Be financially stable
  • Not have engaged in trading within the last three months
  • Not have undergone a name change in the last three months

 

What tax do you have to pay on Voluntary Strike-Off?

Whether Voluntary Strike-Off proves to be the most tax-efficient method for closing your limited company hinges on the value of retained profits intended for distribution to shareholders.

Under Voluntary Strike-Off, retained profits up to £25,000 incur Capital Gains Tax, with a standard rate of 10% (2023/24) for basic rate taxpayers and 20% for those in the higher Income Tax bracket.

However, eligibility for Business Asset Disposal Relief may entitle you to a reduced 10% Capital Gains Tax on asset disposal, irrespective of your Income Tax rate. Additionally, there is an annual Capital Gains Allowance of £6,000 (2023/24).

For retained profits of £25,000, the typical tax payment is 10% of (£25,000 – £6,000), resulting in a £1,900 tax bill.

Profits exceeding £25,000 are treated as income, making Voluntary Strike-Off less tax-efficient. Retained profits are commonly distributed as dividends, attracting tax rates of 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

While directors can opt for a salary instead of a dividend, the director’s Income Tax rate is typically higher, and National Insurance Contributions may also apply.

 

What is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation (MVL) is a formal process for closing a financially sound company with retained profits exceeding £25,000. In this procedure, you must engage a licensed insolvency practitioner to serve as the liquidator. They are responsible for realising and distributing the company’s assets on your behalf, ultimately concluding the company’s affairs and deregistering it from the Companies House.

There is a fee associated with an MVL, typically ranging from £1,500 to £3,000, depending on the extent of work required. It’s essential to consider this cost in your calculations when determining the most economical way to close your business.

To qualify for a Members’ Voluntary Liquidation, you must:

  • Have reserves surpassing £25,000 after settling your final liabilities
  • Have a trading history of more than 24 months

 

What tax do you have to pay on a Members’ Voluntary Liquidation?

If your company possesses a substantial amount of retained profits, opting for an MVL is typically the most tax-efficient approach to winding it down. This is because Capital Gains Tax is applicable to all distributions to shareholders, not just those below £25,000. Moreover, Business Asset Disposal Relief can potentially reduce Capital Gains Tax to 10% for higher rate and additional rate taxpayers.

While an MVL can considerably reduce your tax liability, Income Tax may be applicable to retained profits if:

  • The company has five or fewer shareholders
  • You engage in a similar trade or activity within two years
  • The primary purpose of your MVL seems to be tax avoidance

 

Are you eligible for Business Assets Disposal Relief?

Formerly referred to as Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) lowers your Capital Gains Tax to a mere 10% for higher and additional rate taxpayers.

To qualify for BADR, the following conditions must be met at least two years before the closure of your business:

  • You serve as an office holder of the company
  • You possess a minimum of 5% of the voting rights and 5% of the share capital
  • You have not surpassed the £1 million lifetime limit for claiming BADR

 

How do I choose between Voluntary Strike-Off and an MVL?

In general, if you aim to close a company with retained profits below £25,000, Voluntary Strike-Off stands out as the easiest and most economical choice. However, if your company holds reserves exceeding that amount, opting for an MVL can be a more tax-efficient approach.

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Need advice?

Seek expert advice if you’re uncertain about the optimal company closure option for your situation. We offer tailored information and guidance to assist you in closing your company in the most tax-efficient manner. Contact our team for a complimentary same-day consultation or schedule a face-to-face meeting at any of our 100+ offices throughout the UK.  

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.