How to close a company without paying too much tax

Author
Shaun Barton | Company Closure Expert

Last Updated:

How to close a company without paying too much tax

There are two ways to close down a solvent company in the UK. One is voluntary dissolution and the other is Members’ Voluntary Liquidation (MVL), so how do you close your company without paying too much tax?

Let’s look at voluntary dissolution first.

What is voluntary dissolution?

Voluntary dissolution, or voluntary strike-off, involves applying to Companies House to have your business removed from the Register of Companies. Before submitting the application using form DS01, you must wind down your business affairs.

One of the most important aspects of voluntary dissolution is that there must be no remaining creditors. This process is only appropriate for solvent companies and continuing when it’s not solvent can have serious ramifications later. The business must also not be subject to any insolvency procedures, whether existing or in the pipeline.

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Paying tax and voluntary dissolution

Profits extracted from your business up to £25,000 attract Capital Gains tax (CGT). In some cases, the amount of tax you pay can be lowered to a rate of 10% by claiming Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.

So what if your profits are higher than £25,000? Retained profits exceeding £25,000 are subject to income tax, which could make your tax bill significantly higher when voluntarily striking off your company.

You could extract them as a dividend or director’s salary, but your personal tax rate will dictate how much tax you ultimately pay. The dividend tax rate is currently 8.75%, 33.75%, and 39.35% if you’re taxed at the basic rate, higher rate, or additional rate respectively.

It’s clear then that the level of retained profits in your business is a key indicator for the most tax-efficient way to close it.

Need to speak to someone?

With multiple offices across the UK and a vastly experienced team of business closure experts, you are never far away from the advice you need. Our Licensed insolvency practitioners provide free consultations to all directors and shareholders, and can quickly ascertain which closure method is best for your business.

We are licensed by recognised professional bodies and have helped thousands of directors over many years. Contact us today for your free company closure consultation.

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What is Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation is an official insolvency process used to close a solvent company which is conducted by a licensed insolvency practitioner rather than the directors and attracts professional fees. Although this may appear to be a negative aspect of entering MVL, the financial benefits for shareholders can be significant.

This is because it’s a highly tax-efficient procedure for companies with higher retained profit levels. Again, if the amount of profit exceeds £25,000, MVL is likely to provide the best option for closing your business and the benefits are even higher if you can claim BADR as described above.

There are several caveats, however:

You cannot set up another company that undertakes a similar trade in the next two years
There must be more than five shareholders in your company
You must not enter an MVL as a tax avoidance measure

Taxation when selling a business is complicated and it’s always advisable to seek guidance from a professional advisor. Company Closure helps directors to close down their businesses without overpaying on tax.

We are licensed insolvency practitioners with extensive experience and offer guidance and support on following the most tax-efficient procedures. Please get in touch with one of the team to arrange your free consultation. We operate from offices throughout the UK so you’re never far away from the professional support you need.

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