This refers to the distribution of net assets once a company has been liquidated or dissolved and payment has been made to all creditors – it can also be known as a liquidating dividend.
If the business to be closed is solvent, it may still hold valuable assets. However, there could also be a significant tax bill if owners attempt to extract this. As such, distributions need to be made in a way that is as tax efficient as possible.
The payments are paid from the company to shareholders (who are likely to be directors) and are subject to Capital Gains Tax GOV.UK “Capital Gains Tax” rather than treated as income for income tax purposes. The sums may be distributed minus any fees and other expenses from the liquidation process. Dividend payments are normally subject to income tax GOV.UK “Tax on Dividends” . However, when a limited company is being wound up, it may be possible to close it in a way that means retained profits and additional funds raised through the sales of assets are paid as a liquidation distribution.
Distribution After Informal Strike-Off
In the case of an informal strike-off, the maximum value of share capital and company assets, which can be distributed as capital on strike-off is £25,000.
Profits over this amount will be subject to income tax. All shareholders will have to pay income tax on the distributions they receive at their personal income tax rate. This means any retained profits above £25,000 are usually distributed among the company’s shareholders in the form of a final dividend. The tax rates on dividends are 7.5%, 32.5%, or 38.1%, depending on each shareholder’s personal rate of income tax.
When striking off a limited company with profits below £25,000, the shareholders pay capital gains tax at either 10% for basic rate income taxpayers or 20% for higher rate income taxpayers.
What About Business Asset Disposal Relief?
It may be possible for the company to benefit from Business Asset Disposal Relief GOV.UK “Business Asset Disposal Relief” . This is the new name for the former Entrepreneurs’ Relief. It allows the owner who is disposing of the business to benefit from less Capital Gains Tax – they would pay a rate of 10% on all qualifying assets which are sold. Capital Gains Tax is the tax on the profit when you are selling something which has increased by value.
Business Asset Disposal Relief is usually applicable in a Members’ Voluntary Liquidation (MVL) and is a formal procedure governed by the Insolvency Act 1986 to close down a solvent company. Before the company is closed, its physical assets will be valued, sold, and turned into cash by a licensed insolvency practitioner. That cash will then be distributed among the company’s shareholders.
If you want to close a limited company with share capital and company assets that exceed £25,000, a members’ voluntary liquidation is likely to be more tax-efficient if you’re a higher rate income taxpayer.
Eligibility for Business Asset Disposal Relief is dependent on:
- Selling all or part of the business and the following need to have applied for the last two years up to the date of the sale
- Being a sole trader, business partner or employee of the company
- Holding 5% of more of the share capital of the company and 5% or more of voting share capital, The minimum of 5% must have been in place for at least 12 months before claiming the relief
- Having owned the business for at least two years
Business assets must also be disposed of within three years to qualify for relief. The sum can be worked out by adding together all qualifying assets with any losses deducted. This shows the total taxable gain available for Business Asset Disposal Relief, There is then a deduction of any tax-free allowance, and 10% tax is paid on what is left.
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