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’re thinking about closing your limited company for any reason, you’ll understandably want to do so in the most tax-efficient way possible. The good news is that there are certain insolvency processes and tax relief schemes available to help you minimise your tax liability when bringing a company to a close.

How can I close my limited company?

Deciding to close your limited company is not always easy. However, if you’re sure you won’t need the company again and the business is solvent (able to pay all its debts), there are two ways to close it down - Voluntary Strike-Off or a Members’ Voluntary Liquidation (MVL).

Finding the most tax-efficient closure method will help you extract the highest value from your company and provide you with 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 available. Instead, you’ll need to arrange a Creditors’ Voluntary Liquidation (CVL).

What is Voluntary Strike Off?

Voluntary Strike Off, also known as Dissolution, is the cheapest and easiest way to close a limited company. To initiate the process, you apply to Companies House to have your company struck off the register. You can do this online or by sending the completed form DS01 to Companies House. This is an extremely cost-effective option and as long as your company satisfies certain conditions, it will be struck off the register and will cease to exist.  

To be eligible for strike off, your company must:

• Be solvent
• Not have traded in the last three months
• Not have changed its name in the last three months

“After submitting my '60 Second Test' I received a complimentary Insolvency Options guide packed full of useful information. The team of insolvency specialists phoned me back in less than 10 minutes after reviewing my details and guided me through the next steps. Really helpful! Thank you Sophie!”

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What is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation (MVL) is a formal process used to close a solvent company with a significant level of retained profits. In order to enter into an MVL, a licensed insolvency practitioner will need to be appointed to act as the liquidator and realise and distribute the company’s assets on your behalf. They’ll then bring an end to the company’s affairs and strike it off the Companies House register. 

As an MVL requires the professional services of a licensed insolvency practitioner, there are fees to pay to cover this. However, the tax advantages which can be gained from closing the company via an MVL often eclipse these professional fees. 

To be eligible for a Members’ Voluntary Liquidation, the company must:

• Be solvent and able to pay any outstanding liabilities within the next 12 months
• Have traded for over 24 months

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

If your company has a significant amount of retained profits (typically over £25,000), an MVL is usually the most tax-efficient way to close it down. That’s because all funds extracted from the company are treated as Capital Gains rather than income and are taxed accordingly.

Furthermore, the payable rate of Capital Gains Tax can be reduced to just 10% if you qualify for Business Asset Disposal Relief. 

Are you eligible for Business Assets Disposal Relief?

Formerly known as Entrepreneurs’ Relief, BADR reduces your Capital Gains Tax to just 10% on the disposal of a business. There is a lifetime limit of £1m worth of gains when it comes to BADR.

To be eligible for Business Asset Disposal Relief, the following must apply at least two years before you close your business:

• You are an office holder of the company
• You hold at least 5% of the voting rights and 5% of the share capital
• You have not exceeded your £1 million lifetime limit for claiming BADR 

Need advice?

Always seek specialist advice if you’re unsure which company closure option is the best choice for you. We can provide information and guidance specific to your company to help you close it in the most tax-efficient way. Call our team for a free, same-day consultation or arrange a face-to-face meeting at one of our 100+ offices across the UK.