What are the tax implications of closing your limited company?

Posted on Jul 12th, 2018 | Tax

What are the tax implications of closing your limited company?, image of two pensioners at a laptop

Thinking about closing your limited company? Perhaps you’re retiring or going back into full-time work?

If you want to close a company which is no longer trading, you may have to pay Capital Gains Tax or Income Tax. This applies when you’ve made a profit on the original price of the shares you are disposing of.

You pay Capital Gains Tax or Income Tax depending on how the business is closed and how much profit is left inside the business.

What are the options available to shareholders and directors?

There are generally two options available to shareholders and directors when closing their limited company, as long as the company can pay any debts it has; informal strike off or members voluntary liquidation (MVL).

Close your company down with an informal (voluntary) strike off”

This is an ‘informal’ liquidation or ‘winding up’, by simply applying to Companies House to strike the company off the register. The application is made by submitting certain paperwork to Companies House (known as ‘form DS01’).

This option is available provided your company:

  • has not traded or sold off stock within the last three months
  • has not changed company name within the last three months
  • is not threatened with liquidation
  • has no agreements with creditors, such as a Company Voluntary Agreement (CVA)

If profits are above £25,000, all shareholders have to pay income tax at their personal rate. The proceeds are usually distributed as a final dividend, so the tax rates that apply to a strike off after 6th April 2016 dividends are taxed at either 7.5%, 32.5% or 38.1%, our article “Tax rates, thresholds, and allowances has more information”.

If some of the proceeds are taken as a salary by a director (rather than a dividend) then the amount of tax paid depends on the director’s personal rate, which is usually higher than the dividend tax rate.

Where profits are below £25,000, all shareholders pay Capital Gains Tax. From 6 April 2016, when selling shares, the regular rate of Capital Gains Tax is 10%, or 20% for people paying more than the basic rate of income tax. However, applying for Entrepreneurs’ Relief means you pay a tax rate of 10% on the sale, regardless of the rate of personal tax you pay.

If your company doesn’t meet these conditions, or cannot pay its debts then you may have to liquidate your company – you can find out more about this on the site.

Close your company with a Members Voluntary Liquidation (MVL)

Members Voluntary Liquidation (MVL) is a process used to close down a solvent company. The company’s assets are turned into cash and then distributed to shareholders. An MVL is carried out by a licensed insolvency practitioner.

With an MVL all distributions to shareholders are taxed as a capital gain. So if you’re profit is more than £25,000, this is usually the most tax efficient option after you take into account Entrepreneurs’ Relief.

However, you need to be aware that distributions from the voluntary liquidation of a company may be subject to income tax under the following circumstances:

  • The company is a ‘Close Company’ (ie has 5 or fewer shareholders)
  • Within two years after receiving a distribution the owner is involved with a similar trade or activity
  • The winding up of the company appears to be to reduce tax.

This is only general information, so for bespoke advice please speak with your accountant.

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Written by Jake Smith

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