Finding the most tax efficient way of closing a company is very necessary if you are to extract the highest value from it. It is imperative to know that there are procedures and tax reliefs available that can help you achieve your goals. Note that you can even close a limited company without paying tax – but only up to the limit of your annual tax-free allowance.
2 Ways to Close a Limited Company in UK
There are two main methods of closing down a solvent limited company; voluntary strike off and Members’ Voluntary Liquidation (MVL). Voluntarily striking off a company can offer tax benefits, but whether this is the most appropriate option depends on the amount of share capital that will be distributed amongst the shareholders.
Note that any share capital under £25,000 is liable to Capital Gains Tax (CGT), and also attracts a lower rate than when it was treated as income. However, if you are close to this threshold or are unsure how much share capital there will be, then you are advised to seek further professional advice.
Have it in mind that every amount above the £25,000 limit are treated as income when a limited company closes down so if you are looking to close your limited company without paying excessive tax, specialist guidance is required.
Closing your Limited Company With MVL
Meanwhile, MVL is a common and popular method to close down a limited company and can offer significant benefits from the tax perspective. Additionally, you don’t pay tax up to the amount of your annual tax free allowance, and can also offset business losses against a gain to reduce the amount of tax ultimately paid.
Also note that you may also be able to claim Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) to further reduce your tax liability. This doesn’t necessarily mean you can close a limited company without paying tax, but it does offer a significantly reduced tax rate of 10 percent if you are eligible.
MVL requires the appointment of a licensed insolvency practitioner (IP), but entering this process can prove financially worthwhile when you consider the importance of tax-efficiency at this time. Since a liquidator needs to be appointed to carry out an MVL, the process itself is more expensive. But if the amount of retained profits to be distributed amongst shareholders exceeds £25,000, MVL will generally offer a more tax efficient approach.
Nonetheless, the main tax advantage of closing a limited company using MVL as opposed to Voluntary Strike Off is that the distributions of retained profits amongst shareholders are subject to CGT (as opposed to dividends tax or income tax).
Unlike Voluntary Strike Off, there is no differentiation of profits above or below £25,000. All profits will come under CGT. And just like it was stated above, Business Asset Disposal Relief is also available under MVLs, so this can provide an added tax saving.
How to Qualify for Business Asset Disposal Relief
If you are selling all or part of your business, the following is expected to apply for at least 2 years up to the date you sell the business in order to qualify for Business Asset Disposal Relief:
- You are expected to be a sole trader, a business partner, or an employee of the company. In other words, you are expected to be an individual, not a company. Under HMRC rules, to be classified as an employee or officer, there are no restrictions based on your salary or hours worked. What they do require is evidence of you working, whether that is a contract or payslip
- You have held 5 percent or more of the share capital of the company and 5 percent of voting share capital. This minimum of 5 percent is expected to have been in place for at least 12 months prior to claiming
- You are expected to have owned the business for at least 2 years
Howbeit, things are slightly different depending on whether you are selling shares or are disposing of the business altogether. However, in both circumstances you can qualify for Business Asset Disposal Relief, you should be aware of the main differences between the two:
Selling the Business
If you are selling all or part of your business:
- You need to be the sole trader or business partner for the duration of the qualifying period (2 years)
- You should have owned the business for at least 2 years
Indeed this is good news for company directors that wish to close their company through a Member’s Voluntary Liquidation as it allows them to do so in a tax efficient way.
Just in a situation that you are selling shares, you don’t need to be the company owner. However, you are expected to have been an employee or officer in the company. You should have held the share capital for the whole qualifying period of 2 years.
Coupled with this, to claim on disposal of shares, your company needs to be a trading company and have traded in the qualifying period. To be a trading company, your main activities need to be in trading, as opposed to non-trading activities like an investment.
If, however, the shares are from an Enterprise Management Incentive (EMI), then they are expected to comply with extra qualifying conditions in order to meet the requirements of a Business Asset Disposal Relief. If shares are from an EMI, you are expected to have:
- Acquired them after 5th April 2013
- Have been given the option to buy them at least 2 years before selling them
If you meet both these criteria, you may be able to claim Business Asset Disposal Relief for the disposal of EMI shares.
If retained profits are no more than £25,000, it will more or less be better to opt for Voluntary Strike Off, as money can be saved on a liquidator. But if retained profits exceed £25,000, MVL will normally be a more tax efficient option, but the cost of the liquidator should be taken into account.
If a shareholder director plans to set up a similar business within two years, it will be better for them to opt for Voluntary Strike Off, as the TAAR negates any tax savings. It is important to note that MVL cannot be used by directors who intend to set up another company after closing their current limited company and extracting the profits.