What tax needs to be paid when you close down a limited company
What tax needs to be paid when you close down a limited company
Making the decision to close down or “wind up” your limited company is not always simple, especially when you factor in the tax implications that will arise. Nevertheless, if you are certain that closing your company is the best decision for you, then be sure to also look into which method of winding up your solvent business will be most tax efficient. This article will provide a comparison between informal strike-off and members’ voluntary liquidation to help you decide. Be aware, that you cannot use either of these methods to close down your limited company if you are insolvent (unable to settle your company’s debts and other financial liabilities) and will need to arrange a creditors’ voluntary liquidation.
What is an informal strike off?
An informal strike-off is also referred to as a voluntary strike-off, which may be a more accurate term as the process to close down your limited company in this way is still a formal procedure. An informal strike-off is where you make a request to Companies House for your limited company to be struck-off the register.
How to close down a limited company by an informal strike-off?
To close down your limited company by an informal strike-off you will need to submit your request to Companies House via a DS01 form. Alongside this, you will need to pay a fee of £10. For this to be accepted however, you must satisfy two qualifying conditions:
- The company must not have been trading for at least three months from the date of your application
- The company must not have changed its name for at least three months from the date of your application
If the conditions are met, Companies House will put a public announcement in The Gazette. The purpose of doing this is to allow for any creditors to raise objections against the closure of your company if you still owe them any outstanding payments. However, if you have ceased trading for the previous three months, this is often unlikely, but is still important to be aware of. Once three months have passed from the date of announcement, and so long as no objections have been raised, Companies House will strike off your company’s name from its register and place a final announcement of the company’s closure in The Gazette.
What taxes need to be paid when using an informal strike-off to close down a limited company?
What taxes need to be paid when you use an informal strike-off to close down your limited company is dependent upon the amount of profit left in your business.
Capital Gains Tax on up to £25,000
For any amounts up to the limit of £25,000 or under, profits can be extracted from the company and redistributed to shareholders as capital gains. So long as none of the profits include property (which is unlikely if profits are under £25,000), the capital gains tax (CGT) rates are 10% for basic income taxpayers and 20% for higher and additional rate taxpayers. There may be some opportunities for higher and additional rate taxpayers to reduce their CGT to 10% if their assets qualify under Business Assets Disposal Relief (previously known as Entrepreneurs’ Relief).
Income Tax when over £25,000
If there are profits over the limit of £25,000 that are distributed to shareholders, then this will incur income tax at the taxpayer’s income tax rate. One way to reduce the amount of income tax that may need to be paid is to issue the profits as both salary and dividends in order to make use of the annual dividend allowance of £1,000. Not only that, but dividend is taxed at a reduced rate when compared to income tax as it is 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
What is a members’ voluntary liquidation (MVL)?
A member’s voluntary liquidation (MVL) is when your company chooses to use a licensed insolvency practitioner to dissolve the company for you. Opting for this route to close down your limited company will mean that you surrender your powers as a director and the licensed insolvency practitioner instead takes over and has the authority to make decisions for the business in terms of its winding up.
How to close down a limited company by a member’s voluntary liquidation?
To close down a limited company by a members’ voluntary liquidation (MVL) you will have also needed to cease trading through your company. However, some business activities are still expected to be carried out by you, such as beginning to deregister for VAT, PAYE and completing your final corporation tax return.
As a director, you will need to make a legal declaration that your company is solvent and able to pay all outstanding debts. To do this you will need to prepare a closing financial statement (or get the help from an accountant to help prepare this for you) which is sworn in front of a solicitor or notary. If there is more than one director in your limited company, you will need at least a majority of directors to do this, if not all of them.
Once your declaration has been made, you have 5 weeks to hold a shareholders’ meeting. During this meeting your must allow the shareholders to vote whether they are in agreement to place the company into liquidation and appoint a liquidator. A majority vote is needed in order to be able to proceed using an MVL.
When you have appointed a liquidator, this will be announced in The Gazette. It is at this point that the liquidator takes control of the company and the directors’ powers ends. The liquidator will be able to sell off any of the company assets if they feel this is the best decision to settle creditor claims or realise assets into cash so that the surplus can be distributed to shareholders. They are also able to distribute assets as they are (without selling them) to shareholders if they see fit. If creditors are only paid when the liquidation process has started (from the date that the liquidator is appointed) they will be entitled to receive statutory interest of 8% on top of any amount owed by the company.
To finalise the dissolution of your company, the liquidator will obtain clearance from HMRC. From then, the company name will be struck-off the Companies House register.
What taxes need to be paid when using a members’ voluntary liquidation to close down a limited company?
All assets which are distributed to shareholders by MVL are taxed as capital gains. This is one of the main reasons why choosing to close down your limited company through an MVL could be more beneficial than an informal strike-off, especially where there are remaining profits of over £25,000. Again, CGT could be reduced for higher rate and additional rate taxpayers to 10% where the assets qualify for BADR.
A tax comparison of informal strike-off vs members’ voluntary liquidation
The table below is just one example for illustrative purposes and assumes there is only one director:
|Final earnings left in the company||£100,00||£100,00|
|Dividends taken out to extract funds from company||£75,000||£1,0001|
|Earnings left in the company after dividends||£25,000||£99,000|
|Annual capital gains tax allowance||£6,000||£6,000|
|Remaining earnings that will attract capital gains tax||£19,000*||£93,000|
|Capital gains tax due4||£1,900||£9,300|
|MVL fee (estimation)||None||£3,500|
|Total tax and fees to be paid||£26,212.50||£12,800|
1 Only £1,000 is extracted as dividends to make full use of the tax-free dividend allowance
2 Dividend tax rate is assumed to be the higher taxpayer rate of 33.75%
3 £1,000 dividend allowance deducted from £75,000 dividends
4 Capital gains tax rate is assumed to be reduced BADR rate of 10%
Get help closing down your limited company
Before proceeding with closing your company, you may want to seek expert advice from chartered accountants. We can help guide you through both procedures, as well as advise which may be better for your situation with regards to how much tax will need to be paid and how you could possibly reduce this. Get in touch for a introductory call by completing our online contact form or phoning direct on 01865 24 55 11.
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