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.

When closing a company and extracting the profits, you will need to pay either capital gains tax or income tax.

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 by claiming Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.

So what happens to profits in excess of £25,000? Well with a strike off, profits exceeding £25,000 are subject to income tax. 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.

Members’ Voluntary Liquidation is an official insolvency process used to close a solvent company which is conducted by a licensed insolvency practitioner. Due to the input of an insolvency practitioner, the MVL process does attract 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 Business Asset Disposal Relief as described above.

There are several caveats, however and there is a qualification criteria for claiming Business Asset Disposal Relief:

• 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.