Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
What is the Most Tax-efficient Way to Close a Limited Company?
Minimising tax liabilities when closing your UK limited company requires strategic planning. The two main options are voluntary strike off (typically the best choice for companies with assets under £25,000) and Members’ Voluntary Liquidation (MVL).
My guide explores:
How to choose between voluntary strike off and MVL
Leveraging tax reliefs like Business Asset Disposal Relief
Key considerations to reduce your tax burden legally
Voluntary Strike Off
Voluntary strike-off is the most straightforward and cost-effective method for closing a limited company in the UK, although only appropriate businesses with minimal assets and liabilities. This process involves applying to Companies House to have the company formally removed from the register, effectively dissolving it.
To qualify for a voluntary strike-off, a company must not have traded or sold off any stock in the last three months, changed names within the same period, or be threatened with liquidation. Furthermore, it must not have any outstanding agreements with creditors, including the HM Revenue & Customs (HMRC).
From a tax perspective, the key benefits are:
Lower costs compared to liquidation, reducing overall tax liability
Potential to distribute remaining assets as capital rather than income, often resulting in a lower tax rate
Opportunity for shareholders to utilise their annual Capital Gains Tax (CGT) allowance
Seek professional advice to navigate the process effectively, ensuring you comply with all legal requirements while optimising your tax position.
Tax Implications of Strike Off
The maximum value of company assets and share capital that can be distributed on strike off is £25,000. Any funds that exceed this limit will be taxed as income.
Let’s break this down:
For companies with profits up to £25,000:
These can be treated as capital distributions, subject to Capital Gains Tax (CGT). For the 2024-25 tax year:
The annual CGT allowance is £3,000. Beyond this allowance, CGT rates are:
10% for basic rate taxpayers
20% for higher and additional rate taxpayers
For companies with profits over £25,000:
Any amount exceeding £25,000 is typically treated as income, usually in the form of dividends.
Income Band
Dividend Tax Rate (2024)
Income Tax Rate
£12,571 to £50,270
8.75%
20%
£50,271 to £125,140
33.75%
40%
Over £125,140
39.35%
45%
Remember, there’s a £500 dividend allowance and a £12,570 Personal Allowance to consider.
Important Considerations
Share Capital Distribution: Companies cannot normally distribute share capital when struck off. If your company has substantial share capital, you might need to consider a Members’ Voluntary Liquidation (MVL) instead.
Dormant Companies: If your company has never traded or has been dormant and is up-to-date with tax obligations, you may not owe any tax upon striking off.
Members Voluntary Liquidation
Members’ Voluntary Liquidation (MVL) is a formal procedure that offers a tax-efficient way to close down solvent companies, particularly those with significant assets. Here’s why it’s worth considering:
Key Tax Advantages of an MVL:
Distributions to shareholders are typically treated as capital rather than income
This often results in lower tax rates compared to dividend or salary payments
Shareholders may benefit from Capital Gains Tax (CGT) treatment instead of Income Tax
Potential for substantial tax savings, especially for higher-rate taxpayers
Business Asset Disposal Relief (BADR):
BADR, formerly known as Entrepreneurs’ Relief, can reduce the CGT rate to 10% on qualifying assets up to a £1 million lifetime limit. This relief is available to eligible shareholders, potentially leading to significant tax savings.
Process Overview:
An MVL involves directors declaring company solvency, appointing a licensed insolvency practitioner, settling liabilities, and distributing remaining funds to shareholders. The company is then formally dissolved.
While an MVL involves higher upfront costs due to professional fees, the potential tax savings often outweigh these expenses for asset-rich companies. It also ensures a legally compliant and professionally managed closure process.
Targeted Anti-Avoidance Rule: What Directors Should Know
If you’re a director considering a Members’ Voluntary Liquidation (MVL) to close your company, it’s crucial to understand the Targeted Anti-Avoidance Rule (TAAR). This rule, introduced in 2016, could significantly impact the tax efficiency of your MVL if you plan to continue in a similar line of business after closing your current company.
TAAR is particularly relevant if you’re thinking about:
Starting a new company in a similar field within two years of liquidation
Continuing to work in the same industry, even if not as a company director
Transferring your business activities to another existing company
In these scenarios, HMRC might view your MVL as a tax avoidance strategy rather than a genuine business closure. If TAAR applies, the tax benefits of an MVL could be nullified, with distributions treated as income rather than capital gains.
Key conditions that trigger TAAR:
You held at least 5% of company shares before liquidation
Your company was a ‘close company’ in the two years before winding up
You remain involved in a similar trade within two years of distribution
A main purpose of the winding up is to avoid or reduce Income Tax
If you’re unsure whether TAAR might apply to your situation, it’s essential to seek professional advice before proceeding with an MVL. A tax expert can help you navigate these rules and determine the most appropriate way to close your company while remaining compliant with tax laws.
It’s important to note that TAAR is self-assessed, and there’s no clear guideline on the procedure. This puts the onus on the individual and their advisers to reach a conclusion.
Is it More Tax Efficient for Me to Choose Strike Off or MVL?
The choice between a voluntary strike off and a Members’ Voluntary Liquidation (MVL) depends on your company’s financial situation, future plans, and the associated costs. Here’s a quick guide to help you decide:
Consider voluntary strike off if:
Your company has less than £25,000 in assets
You’re looking for a simpler, less expensive closure process
You can utilise your annual Capital Gains Tax (CGT) allowance
Consider MVL if:
Your company has assets significantly exceeding £25,000
You qualify for Business Asset Disposal Relief (BADR)
The potential tax savings outweigh the liquidator’s fees
FAQ: How to Close a Limited Company Without Paying Tax
How can I utilise Business Asset Disposal Relief when closing my company?
To benefit from BADR, ensure you hold at least 5% of the shares and voting rights, have been an employee or director, and have owned the business for at least two years prior to its disposal.
Do I need to pay Capital Gains Tax if I close my company through an MVL?
Yes, the distribution of assets via an MVL is subject to Capital Gains Tax. However, qualifying for BADR can reduce the CGT rate to 10% on the first £1 million of qualifying assets.
