How to close a limited company tax efficiently - VW Taxation Ltd

How to close a limited company tax efficiently

There are several different reasons why a business owner or owners might want to close a limited company. It might be the company owes money and is no longer profitable. Perhaps they want to switch to a different model such as a sole trader or a partnership. Maybe they simply want to retire and can’t find a buyer for the business or it is no longer viable.

The key in closing a solvent company for most business owners is making it as tax efficient as possible. There may be a whole host of revenue available from monies accrued by the company to stocks and shares and income from the sale of assets once the business winds down.

Options for solvent businesses include members’ voluntary liquidation or a more informal voluntary strike-off, both of which have their pros and cons.

A lot will depend on the amount of assets your business activities have produced and how many stakeholders the revenue needs to be divided between.

What happens when you need to close a limited company?

If your business is solvent and is able to meet its liabilities on time, then there are two options if you wish for closing a limited company.

These are:

  • Voluntary strike-off or dissolution
  • Members voluntary liquidation (MVL)

These solutions are different from creditors’ voluntary liquidation where a distressed business, with the approval of stakeholders and shareholders, decides to put the company into liquidation in order to pay off some or all of its debts.

In most cases, when you apply to companies house to dissolve a solvent limited company, you will also want the most tax-efficient method and reduce the income tax and capital gains tax that you need to pay on all your business assets including shares.

Voluntary strike

A voluntary strike-off is probably the most common way to dissolve a limited company. It is also known as dissolution.

While it is often considered informal, the business there are certain rules to follow. That includes not trading for the preceding three months before the dissolution takes place.

This means that the company cannot trade at all and can only handle business such as settling debts and engaging in the process of winding the company down.

During this period, the owners of the limited company will need to:

  1. Hold a meeting and get an agreement to dissolve the limited company.
  2. Apply in writing using a DSO1 form and ensure that all directors sign the agreement.
  3. Contact all relevant stakeholders including shareholders and creditors to inform them that you are closing your limited company.

What is a DSO1 form?

The DSO1 form needs to be completed and sent to companies house and this can either be done online or using a paper copy.

Once the form is completed, there is a three-month period of grace but if there are no objections raised then the dissolution takes place once this time has elapsed.

The limited company has to follow certain rules such as settling debts and abiding by statutory guidelines.

Is voluntary strike-off tax efficient?

If, after settling the limited company debts, there is capital left over, then this can be distributed to the shareholders. For the first £25,000, recipients only have to pay capital gains tax that is charged at 10%.

Any amount over that threshold is considered income and the shareholders and directors will need to pay the appropriate income tax rate depending on their liability.

A dissolution of this type is the most tax-efficient way when the profits are under £25,000 where those receiving dividends are charged the lower capital gain rate. It generally means you don’t have to pay income tax.

For more complex limited company windups a MVL is usually more appropriate.

Members voluntary liquidation

A member’s voluntary liquidation is a more formal process that requires the company to appoint a liquidator who is tasked with closing down the business. While this involves an additional cost it can reduce the tax burden for shareholders and directors.

In order to implement an MVL, the company will need to:

  • Ensure that three-quarters of the directors agree and sign a declaration of insolvency and pass a resolution to voluntarily liquidate the limited company.
  • This resolution needs to be published in the official public record The Gazette within 14 days.
  • The business needs to appoint a professional insolvency practitioner who will take charge of the company and deal with the winding up of the limited company.
  • Companies house need to be informed of the decision within 15 days of the resolution passing.

The benefits of members’ voluntary liquidation

The MVL gives you more scope for tax-efficient savings when dissolving your limited company.

You can offset your tax against losses within the company and you may also be able to claim Business Asset Disposal Relief which means you may only be charged 10% for most of your income.

An MVL can take much longer than a voluntary strike off but it can be worth it where income exceeds £25,000 and the company assets are more complicated.

Am I eligible for Business Asset Disposal Relief?

Originally called Entrepreneur’s Relief, business asset disposal relief allows you to pay a lower rate of 10% on qualifying assets if you meet the eligibility criteria.

At least 2 years before you decide to sell or dissolve your company:

  • You must be a business partner or sole trader.
  • You need to have owned the business for those two years as a minimum.
  • If you are selling shares or securities relating to the company, then you need to be an office holder or employee and the company’s main activity must have been in trading or was a holding company of a trading group.

There are additional rules if your income was received from an Enterprise Management Incentive. You can find out more here.

Frequently Asked Questions on how to close a limited company tax efficiently

Do I have to pay corporation tax if I close my company, UK?

If you are a solvent company you still need to pay corporation tax as usual on any profits made during the financial year.

What happens to the director of a dissolved company?

If the company is dissolved using a voluntary approach and all the rules are followed, it does not prevent someone from becoming a director in the future.

There has, however, been a crackdown in legislation to prevent directors from using a company voluntary arrangement to avoid paying debts and if found liable you could be prevented from holding a directorship for up to 15 years.

How long does it take to close a limited company?

The minimum time for closing your limited company is 3 months using a voluntary strike-off. This gives time for any third parties to lodge an objection.

For MVLs, the process can take longer, up to 12 months.

Conclusion

If you own a solvent company and now want to dissolve it’s limited company status, there are two options: voluntary strikoff and MVL. Which you choose will depend on the level of assets you have and getting professional advice is essential if you want maximum value and to reduce your tax burden.

If you want to know how to successfully close a limited company, contact us to reach the team at VW Taxation today.

 

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Picture of Gary Ellis | Director | VW Taxation
Gary Ellis | Director | VW Taxation

VW Taxation are self employment tax specialists based in Portsmouth. We specialise in tax accounting for contractors, limited companies and the self-employed.

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