When closing a limited company, doing it in the most tax-efficient manner is often quite tricky to do, especially when you have to think about business asset disposal relief, how to pay income tax, or finding a way for interested parties to pay you fairly if you end up selling your company.
Out of all the factors you have to consider, having to pay tax in the most tax-efficient way possible is truly the most difficult problem to answer. But, is it possible to close a limited company without paying tax at all?
If you want to get the most value out of a company, you’ll need to find the most tax-efficient way to close it, and it’s useful to know that there are procedures and tax reliefs that can help you get there. You can even dissolve a limited liability business without paying taxes – but only up to the amount of your yearly tax-free allowance.
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How can you close the company in the most tax-effective way possible?
Read on to find out which option is the most tax-efficient and appropriate for your business and the alternatives.
Table of Content
- 1 Signs that it’s time to close your company
- 2 Closing an insolvent company
- 3 Cost of Closing a Limited Company
- 4 Options When Closing a Limited Company
- 5 Making your company dormant
- 6 FAQs
- 7 Summary
- 8 All UK Insolvency Practitioners
Signs that it’s time to close your company
Closing a business you’ve worked hard to develop can be a difficult decision, but signs often point out that it’s time to close shop.
Here are some signs that it’s time to close a business:
- The company isn’t making any money anymore.
- Your product or service isn’t in high demand anymore.
- You can’t seem to fix your recruitment or retention issues.
- Your health has gotten worse.
- The limited company structure no longer works for you from a tax or administrative standpoint.
- On a more positive note, you could be that you are starting a new business and want to concentrate on that instead.
Closing an insolvent company
Insolvency is defined as a company’s inability to pay its payments as they become due. Your creditors are the people to whom your company owes money, and they’re the ones that take legal precedence over the directors and shareholders. Simply put, you must pay off all of your debts before collecting any money from the corporation.
Putting in place a Company Voluntary Arrangement (CVA) can help you avoid having to liquidate your business. You make this deal with your creditors to pay off as much of your debt as possible while avoiding or delaying the liquidation process.
On the other hand, if liquidation appears unavoidable, a Creditors’ Voluntary Liquidation (CVL) would be the best option. You’ll need to schedule a shareholders’ meeting, and the CVL must receive at least 75% of the vote.
After that, you can appoint a licensed insolvency practitioner (IP). If you don’t choose a CVL, creditors can force you to liquidate your assets to get their money back.
Cost of Closing a Limited Company
The costs of winding up a limited business differ depending on how the company is wound up. Of course, regardless of how you close the business, you’ll have to pay all remaining taxes and employee wages. The most cost-effective alternative is to strike off a solvent company, which requires a charge to be paid to Companies House.
An MVL will entail a liquidator’s charge, which typically ranges from £1,500 to £1,500 + VAT. However, it also depends on the process’s complexity.
A CVL is usually the most expensive option to terminate a business, costing between £3,000 and £7,000 on average. If the company’s assets are insufficient to cover these expenses, the directors may be held personally accountable.
How much tax do I pay?
Your reserves can be distributed as capital if your limited business is liquidated by a licensed insolvency practitioner. This means they are subject to capital gains tax (CGT) with a rate of either 18% or 28%.
Options When Closing a Limited Company
There are two main cost-effective ways to close a company. These are the voluntary strike-off and Members’ Voluntary Liquidation (MVL). Whether you lack funds or have enough reserved funds, these options are the best tax-efficient options for your company:
MVL (Members’ Voluntary Liquidation)
An MVL is a formal process used to close a solvent company. Licensed insolvency practitioners are called in to aid the company in turning assets into cash. The money received from this is then equally distributed to the company shareholders.
Directors may be able to claim Entrepreneur’s Relief (ER) if there is £25k or more taxed on shareholders using capital gains tax rather than dividends. To claim ER, the directors must declare that the company pays for everything, including the cost of liquidation, in full.
MVLs and the TAAR
Many advisers are concerned about the continuous availability and effectiveness of distributions in a winding-up through a Members’ Voluntary Liquidation (‘MVL’) due to the Targeted Anti-Avoidance Rule (‘TAAR’) imposed by Finance Act 2016.
The TAAR is a relatively new tax law that allows a taxpayer to regard proceeds obtained from a company’s liquidation as “income” rather than “capital” for tax purposes.
The General Anti-avoidance Rule (GAAR) is a concept that allows a country’s Revenue Authority to deny tax benefits to transactions or arrangements that have no business substance and are solely to obtain a tax benefit.
Voluntary Strike Off
Striking off a company voluntarily can provide tax benefits, but whether this is the best solution depends on the share capital distributed among the shareholders.
Shared capital amounts valued at less than £25,000 are subject to Capital Gains Tax (CGT), which means it is taxed at a lesser rate than if it were considered as income. However, if you’re approaching this threshold or are unsure how much share capital you’ll need, you should get additional professional guidance.
Making your company dormant
Anyone can transition into dormant companies, but how does one go about it, and what are the tax implications?
You can put a firm into dormancy at any moment, meaning if contractors who operate as limited firms return to full-time work, they may choose to put their businesses on hold for a while. You’ll also need to close your payroll, settle any outstanding bills, and possible get rid of certain business assets.
In a nutshell, this means that your business will be put on hold. However, from a tax perspective, it’s also possible to revive the business once your funding improves and if you believe you will do business with your firm again in the future.
Why Close Down Your Limited Company?
There are numerous possibilities for departing your business if you desire to pursue other interests or retire. These include:
- You don’t want to sell the business, or company.
- You haven’t been able to find a suitable buyer.
- No one in the family is capable of taking over.
Can I just walk away from my limited company?
It is feasible to close your firm and walk away, but the technique you use will be determined by your company’s financial situation. A voluntary strike-off may be an option if your company is viable, but this isn’t a legal procedure and can result in reinstatement if creditors aren’t notified.
What tax do I settle in a voluntary strike-off?
The amount of tax you pay when taking out the remaining profits from your business is determined by several factors. If your final profits are less than £25,000, all shareholders will have to pay capital gains tax (CGT). CGT is 10% for basic rate taxpayers and 20% for higher rate taxpayers; however, if you qualify for entrepreneurs’ relief, CGT is only 10%.
If your profits exceed £25,000, you’ll have to pay income tax for that. The tax rate is determined by whether profits are distributed as salary or dividends and the personal tax rate of each shareholder.
What tax do I pay in an MVL?
The funds distributed from an MVL are usually only subject to CGT, which is only 10% if you qualify for entrepreneurs’ exemption. However, if you don’t, the tax will be more, but it will still be less than dividend income tax.
Under certain circumstances, however, the MVL funds may be subject to income tax:
- There are no more than five stockholders in your company.
- Within two years, you are participating in a similar trade or activity.
- Your MVL looks to be mostly focused on tax avoidance.
If you have questions about this, it’s best to seek specialist advice first before moving forward with any insolvency proceedings or choosing a tax efficient option.
Insolvent Companies vs Solvent Companies
After all the debts have been paid, solvent companies are those that still have assets left over. These assets are then distributed to your heirs in accordance with your Will or, if there is no Will, state law.
In contrast, an insolvent estate is one in which the debts exceed the value of the assets.
Having the right financial tools can definitely make finding the most tax-efficient method of closing a company much easier because then, you’ll know all about what tax treatment limited companies need, what happens to a company’s retained profits and final dividend, and the like.
So, if you’re considering closing your limited company or thinking about taking a break, you should get to understand the basics and all the details first. While there is lots of advice on how to start a limited business, figuring out what’s required in closing one isn’t always straightforward. After all, you may want to close your limited business for a variety of reasons.
But it’s not as simple as closing your doors, removing your website, and notifying your clients and customers that you’re no longer in business. If you’ve decided to close your limited business, you’ll need to execute several legal processes. The actions you must follow to close your limited company, as well as the charges associated, will be determined by the state of your business.
All UK Insolvency Practitioners
Here is a full list of Insolvency Practitioners in the UK who professional debt help and confidential advice:
- 1st Business Rescue Review
- Abbotts Insolvency Review
- Anchorage Chambers Insolvency Review
- Anderson Brookes Insolvency Review
- Angel Advance Insolvency Review
- Begbies Traynor Insolvency Review
- Bennett Jones Insolvency Review
- Best Bankruptcy Companies
- Best Company Administration Companies
- Best Company Dissolution Companies
- Best CVA Companies
- Best CVL Companies
- Best DAS Companies
- Best Full and Final Companies
- Best Insolvency Practitioners
- Best IVA Companies in Manchester
- Best IVA Companies UK
- Best MVL Companies
- Best Partnership Administration Companies
- Best Partnership Liquidation Companies
- Best Partnership Voluntary Arrangement Companies
- Best Pre Pack Administration Companies
- Best Sequestration Companies
- Best Trust Deed Companies
- Carrington George Associates Insolvency Review
- Chamberlain & Co Review
- Clarke Bell Licensed Insolvency Practitioner Review
- Creditfix Insolvency Review
- Debt Champion Insolvency Review
- Debt Consolidation Companies
- Debt Focus Insolvency Review
- Debt Relief Order Companies
- Debtfree4me Insolvency Review
- DMP Companies
- Financial Support Systems Insolvency Review
- Focus Insolvency Group Review
- Forbes Burton Licensed Insolvency Practitioners Review
- Forest King Insolvency Review
- Freeman Jones Insolvency Review
- Greenfield Recovery Review
- Gregory Pennington
- Griffin & King Licensed Insolvency Practitioners Review
- Hanover Insolvency Review
- Insolvency Administrator Rights
- Jarvis Insolvency Review
- Johnson Geddes Insolvency Review
- Keystone Recovery Licensed Insolvency Practitioners Review
- Leonard Curtis Insolvency Review
- McCambridge Duffy Insolvency Review
- MoneyPlus Insolvency Review
- NTF Financial Solutions Insolvency Review
- PayPlan Insolvency Review
- Purnells Insolvency Practitioners Review
- Quality Insolvency Services Review
- Re10 Finance Insolvency Review
- Real Business Rescue Review
- Spencer Rowe Insolvency Review
- The Debt Advisor Insolvency Review
- The Insolvency Practice Review
- Turpin Barker Armstrong Insolvency Practitioners Review
- Umbrella Accountants Insolvency Review
- Unity Corporation Insolvency Review
- Vanguard Insolvency Review
- Wilson Field Licensed Insolvency Practitioner Review
- X Debt Insolvency Review
The insolvency practitioner list above gives you plenty of options to choose the best debt help firm in November 2023.