What tax do you pay when you close a limited company?

Tax when closing a limited company

The tax you pay when voluntarily closing a limited company will primarily be determined by the closure route; strike off, company liquidation or Members’ Voluntary Liquidation (MVL). This decision will be based on whether the company is solvent or insolvent, and how much cash is left in the business after paying creditors. A licensed insolvency practitioner can advise on the most suitable route for closing your company.

The tax you pay when closing a company will directly impact your financial position and your timeline for closing your company. Working closely with your accountant is essential throughout this stage to maximise tax efficiency and take-home pay. We look at the tax implications of closing a solvent and insolvent limited company.

Tax implications of closing an insolvent limited company

There are two ways of closing an insolvent company – striking off/dissolving, or a Creditors’ Voluntary Liquidation (CVL). Dissolving a company is a low-cost and informal route to closing a company with no profits or debts, and a Creditors’ Voluntary Liquidation is a formal route for closing a company with debts.

As the company is insolvent and out of cash in both cases, there are often little to no funds available to extract. During a Creditors’ Voluntary Liquidation, any available funds are distributed to creditors in priority order, as set out by the Insolvency Act 1986 and cover the insolvency practitioner’s fee.  

If you’re closing a company with substantial retained profits, consider a Members’ Voluntary Liquidation, a tax-efficient route for closing a solvent limited company.

Tax implications of closing a solvent company

Closing a limited company through a Members’ Voluntary Liquidation is a popular exit route for solvent companies due to the associated tax efficiency. An MVL is suitable for companies with over £25,000 in retained profits as profit distributions are treated as capital and therefore, subject to Capital Gains Tax, which is more tax efficient than income tax.

The company director must ensure that any outstanding corporation tax, PAYE and VAT liabilities are settled before initiating the Members’ Voluntary Liquidation.

If eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), businesses can reduce Capital Gains Tax to a reduced flat rate. As such, a Members’ Voluntary Liquidation can be highly tax efficient for solvent businesses looking to extract funds and close their business.

How can we help?

If you are considering closing a limited company, it’s important to follow the prescribed methods for solvent and insolvent limited companies and seek professional advice from a licensed insolvency practitioner. There are cheap and tax-efficient ways for closing a limited company which may involve timing the closure of your company ahead of changes to tax rules, structuring profit distributions tax-efficiently, and using experienced company closure experts to guide you throughout the process.

For more information on tax when liquidating a solvent or limited company, get in touch with a licensed insolvency practitioner at UK Liquidators. We have a vast network of over 100 offices across the country, or we’re just a phone call away. For a free, same-day consultation, contact a member of the UK Liquidators team today.