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What tax do I have to pay when closing my company?
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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. The good news is that there are procedures and tax reliefs available to help you minimise your tax liability.
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).
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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. The process costs no more than £10, 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
Whether Voluntary Strike-Off is the most tax-efficient way to close your limited company will depend on the value of the retained profits to be distributed to the shareholders.
In Voluntary Strike-Off, retained profits under £25,000 are taxed as Capital Gains, while any profits over £25,000 are subject to Income Tax. The regular rate of Captial Gains Tax is 10% (2023/24) for basic rate taxpayers and 20% if you pay Income Tax at the higher rate.
However, you may be eligible for Business Asset Disposal Relief. If you are, you’ll pay just 10% Capital Gains Tax on the disposal of assets, regardless of your Income Tax rate. You also have an annual Capital Gains Allowance of £6,000 (2023/24).
So, on retained profits of £25,000, you’ll typically pay 10% of (£25,000 - £6,000), leaving you with a tax bill of £1,900.
Any retained profits over £25,000 are taxed as income. This is where Voluntary Strike-Off becomes less tax-efficient. Retained profits are usually distributed as a dividend, which means you’ll pay tax at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate).
A director can take retained profits out of the company as a salary rather than a dividend. However, the director’s Income Tax rate will usually be higher than the rate of Dividend Tax. You may also have to pay National Insurance Contributions.
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A Members’ Voluntary Liquidation (MVL) is a formal procedure to close a solvent company with retained profits of over £25,000. You have to appoint a licensed insolvency practitioner 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.
There is a fee for an MVL, which is typically £1,500-£3,000 depending on the amount of work required. This is something to factor into your calculations when determining the most cost-effective way to close your business.
To be eligible for a Members’ Voluntary Liquidation, you must:
- Have reserves of over £25,000 after paying your final liabilities
- Have traded for over 24 months
If your company has a high amount of retained profits, an MVL is usually the most tax-efficient way to close it down. That’s because you pay Capital Gains Tax on all the distributions to shareholders, not just those under £25,000. Capital Gains Tax can also be reduced to just 10% for higher rate and additional rate taxpayers if you qualify for Business Asset Disposal Relief.
While an MVL can reduce your tax bill significantly, your retained profits could be subject to Income Tax if:
- The company has five or fewer shareholders
- You get involved in a similar trade or activity within two years
- The primary aim of your MVL appears to be tax avoidance
Formerly known as Entrepreneurs’ Relief, BADR reduces your Capital Gains Tax to just 10% for higher and advanced rate taxpayers.
To be eligible for BADR, 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
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Generally speaking, if you want to close a company that has retained profits of under £25,000, Voluntary Strike-Off is the simplest and most cost-effective route. If your company has reserves above that level, an MVL can prove to be more tax efficient.
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.
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