There are many reasons to close a limited company. For example, you may have decided to retire, or return to employed work as opposed to freelancing or contracting. Whatever your reasons for closing a limited company, there are different options to consider, and potential issues to be aware of.
If your company is no longer trading and you are ready to close it down permanently, dependent on the value of your shares in the business, you may owe Income Tax or Capital Gains Tax – it is which type of tax you owe that factors into the route you take for closing your company.
Courses of Action for Closing a Limited Company
There are two main courses of action that directors or shareholders of a limited company can choose to take.
Voluntary strike-off is an informal process for closing a solvent limited company. To achieve an informal strike-off, a DS01 form must be submitted to Companies House, requesting that your company be struck off their register. However, if your limited company has traded within the last 3 months or changed its name in this time, this route cannot be taken. However, HMRC does recognise that a company will have to carry out certain activities in this time, for example:
- Selling or disposing of company assets
- Paying creditors
- Complying with statutory requirements
- Seeking professional advice for closing the company
When a limited company is informally struck off and the cash remaining in the business is in excess of £25,000, shareholders are required to pay income tax on it. Paying income tax at a personal rate can be costly, so seeking advice from an accountant to find a more tax-efficient method to reduce the profits down below £25,000 is advisable.
A company with retained profits of less than £25,000 can distribute shares as a capital distribution and instead pay Capital Gains Tax.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation is a formal liquidation procedure, administered by a licensed insolvency practitioner. It is often the most tax-efficient way to close a company if a voluntary strike-off cannot be used or if cash remaining in the company is above the £25,000 threshold. In an MVL, profits distributed to company shareholders are subject to Capital Gains Tax, rather than the more costly Income Tax.
In addition to the tax benefits of CGT, it may also be possible to utilise Entrepreneurs Relief, so tax may be as low as 10%.
You should be aware that there are circumstances where MVL distributions will be subject to Income Tax, for example:
- If it appears to HMRC that the business has been closed by MVL purely to reduce the tax bill
- If you begin trading again in a similar way within two years
Which Option is Right for You?
The right option for closing a limited company will depend on the profit left in the business, along with your personal situation. It may be that both routes may be applicable to you, but it is important to remember that all assets extracted from a business via liquidation are subject to Capital Gains Tax, whereas assets exceeding £25,000 are subject to income tax in a voluntary strike-off.
If the remaining cash assets of your limited company are likely to exceed £25,000 after creditors have been paid, or if your company structure is complex, an MVL is probably the more beneficial choice, however, it is advisable to seek the services of a professional advisor to ensure you take the right route for you.
For more advice on closing a limited company, you can contact BEACON LIP.