How to close a limited company without paying too much tax
First published 10 January 2020 • Updated 10 January 2020
The two main ways to dissolve a limited company are:
- An informal or voluntary strike-off
- Members’ voluntary liquidation.
Find out which of these is most tax-efficient and suitable for your company – and also what the alternatives might be. You’ll find out that there’s much more to closing your company than just closing the doors.
Why do you want to close your company?
You can’t run your company forever, and there are many options for exiting your company when you want to move on to other things or retire. But why would you want to end the company’s existence altogether?
Perhaps you want to leave the business and extract maximum value from it, but:
- You don’t want to sell the company, or
- You can’t find a suitable buyer, or
- No-one in the family can take over
Alternatively, you (or other shareholders) might want to continue to run the business, but under a different legal structure (e.g. partnership or sole trader).
Signs that it’s time to close your company
Sometimes, your company itself may try to tell you that it’s time to call it a day. Closing a company that you’ve worked hard to build up can be a very emotional decision. In most cases you should let your head rule your heart. Here are some indications that it may be time to wind a company down.
- The business is no longer profitable
- Your product or service is no longer in demand
- You have recruitment or retention problems you can’t solve
- Your health has deteriorated
- The limited company structure no longer suits you from a tax or admin point of view
A final, more positive reason may be that you are building up a new company and want to focus on that instead.
Now we’ll move on to the two main ways in which you can liquidate a solvent company.
What are the options for liquidating your company?
Provided that your company is still a going concern (i.e. able to pay its bills as they fall due), you have the choice of two methods to wind it down:
- Informal or voluntary strike-off
- Members’ voluntary liquidation
Informal strike-off (voluntary strike-off)
You can apply to Companies House to have your company struck off the register. Although this is called an ‘informal’ strike-off, it is really a misnomer, since the process is formal! The other term ‘voluntary strike-off’ is more accurate, as this distinguishes it from a compulsory strike-off, in which a third party forces you to cease trading.
How to apply for voluntary strike-off
To apply for your voluntary strike-off, you need to submit form DS01 to Companies House. Prior to this, your company must have been inactive for at least three months. It must have ceased trading, and can only carry out a limited range of activities such as settling debts, complying with statutory requirements, and disposing of certain business assets (excluding stock).
Taking profit from your company in a voluntary strike-off
If your company has any retained profits at the time of winding down, you can take these as a dividend, and perhaps partly as a director’s salary.
What tax do I pay in a voluntary strike-off?
When taking out the last profits from your company, the amount of tax you pay will depend on a number of factors.
If the final profits you take out are £25,000 or less then all shareholders will pay capital gains tax (CGT) on them. CGT is 10 per cent for a basic rate taxpayer and 20 per cent for a higher rate taxpayer; however, if you qualify for entrepreneurs’ relief it will be 10 per cent.
If the profits total more than £25,000 then they are subject to income tax. The rate of tax payable depends on whether profits are taken as salary or dividends, and on each shareholder’s personal rate of tax.
When is a voluntary strike-off not allowed?
You can’t apply for your company to be struck off if it is already subject to insolvency proceedings, or to a section 895 scheme of arrangement.
The pros and cons of a voluntary strike-off
Pros: An informal or voluntary strike-off is a fairly simple process that doesn’t require specialist advice. If your retained profits are below the £25,000 margin then it may be the best option.
Cons: If your company has a lot of retained profits (e.g. over £25,000) then a members’ voluntary liquidation (MVL) may be a better value option from a tax perspective.
Members’ voluntary liquidation (MVL)
An MVL closes down a solvent company and distributes the assets to shareholders as cash. You’ll need to appoint a licensed insolvency practitioner to manage the process.
With an MVL, instead of taking the retained profits as a final dividend (which counts as income), the profits are distributed to shareholders as a capital gain, and so is subject to CGT. This is the key difference, as it can mean a much lower final tax bill if you also qualify for entrepreneurs’ relief.
You will have to pay the insolvency practitioner’s fee, of course, but overall it should work out as much less costly.
An MVL takes about 12 months from start to finish. Shareholders will usually receive around 75 per cent of their funds within three months, and the rest within the following two months.
What tax do I pay in an MVL?
Usually the funds distributed from an MVL will be subject only to CGT, which is just 10 per cent if you qualify for entrepreneurs’ relief. (If you don’t it may be more, but usually still less than dividend income tax).
The MVL funds may however be subject to income tax under certain conditions:
- Your company has five shareholders or fewer
- You get involved in a similar trade or activity within two years
- The primary aim of your MVL appears to tax avoidance
The pros and cons of an MVL
Pros: If you have a lot of retained profits then an MVL is usually much more tax-efficient than a voluntary strike-off.
Cons: The MVL process can take longer than a strike-off, and you have to appoint an insolvency specialist.
Closing an insolvent company
A company that becomes unable to pay its bills as they fall due is deemed to be insolvent. In this scenario, your creditors (the people to whom your company owes money) take legal priority over the directors and shareholders. In other words, you must settle all your debts (as far as possible) before taking any money from the company yourself.
You can initially attempt to avoid liquidation your company by putting in place a Company Voluntary Arrangement. This is an agreement made with creditors to pay as much of your debts as possible, while preventing (or at least postponing) liquidation.
If liquidation seems unavoidable, your best approach is a Creditors’ Voluntary Liquidation (CVL). You will need to call a shareholders’ meeting, and at least 75 per cent must vote for the CVL. You can then appoint your insolvency practitioner.
If you don’t opt for a CVL, creditors can force a compulsory liquidation to recover their money.
Making your company dormant
If your company is struggling to thrive but you feel it could do better in the future, you can ‘mothball’ it or put it on hold. Making a company dormant means it is no longer actively trading, but continues to be listed at Companies House and can be revived at a later date.
You can make a company dormant at any time, even right after its incorporation (you might do this if you want to register a company’s name but only start trading at a later date). Contractors who operate as limited companies may also want to make their companies dormant for a while if they return to full-time employment. You must also close your payroll and settle any debts.
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