Tax Implications of Closing a Limited Company in the UK

Table of Contents

Closing Business

Introduction to tax implications of closing a limited company

Closing a limited company in the UK can have various tax implications depending on the method you choose and your specific circumstances. In this blog, we’ll explore the tax consequences of closing a limited company, with a particular focus on the informal (voluntary) strike off and members’ voluntary liquidation (MVL). We will also discuss the factors to consider when deciding which option is best for your situation.

Informal (Voluntary) Strike Off

One of the simplest ways to close a company in the UK is through an informal (voluntary) strike off. This process involves applying to Companies House to have the company removed from the register using a DS01 form. However, there are specific conditions and limitations to consider:

a. Trading or Name Changes: A company cannot choose this option if it has traded or changed its name in the last three months.

b. Insolvency Proceedings: If any insolvency proceedings have been initiated but not yet resolved, or if a Section 895 scheme is in place, the informal strike off is not available.

Tax Implications of Informal Strike Off

If your company’s retained profits exceed £25,000, all shareholders will be required to pay income tax on their share of the profits at their marginal rate. Typically, these profits are distributed as final dividends with current rates ranging from 8.75%, 33.75%, to 39.35%, depending on your marginal tax rate.

However, if the company’s profits exceed £25,000, the distribution is treated as a capital distribution, subject to capital gains tax. The rate can be as low as 10% if you qualify for business asset disposal relief.

To minimize the tax implications of an informal strike off, it’s advisable to explore ways to reduce the retained earnings below £25,000. Consulting with a tax professional can help you make informed decisions.

Members’ Voluntary Liquidation (MVL)

Members’ Voluntary Liquidation (MVL) is a process used to close down a solvent company in the UK. In this method, the company’s assets are converted into cash, which is then distributed to the shareholders. The key aspects of MVL include:

a. Solvent Company: MVL is suitable for companies that are solvent, meaning their assets exceed their liabilities.

b. Distribution Subject to Capital Gains Tax: All distributions made through MVL are subject to capital gains tax, which can be as low as 10% if you qualify for business asset disposal relief.

c. Involvement of an Insolvency Practitioner: To carry out an MVL, you must appoint a licensed insolvency practitioner who will oversee the process, ensuring that assets are liquidated and distributed to shareholders properly.

Which option is best for me?

Deciding which option is best for closing your limited company depends on your specific circumstances. Factors to consider include the financial health of your company, the amount of retained profits, and your personal income. It is advisable to consult with our tax professionals who can provide tailored guidance based on your situation.

Conclusion

Closing a limited company in the UK involves various tax implications, and choosing the right method is crucial for minimizing tax liabilities. While the informal strike off may be suitable for companies with minimal retained earnings, an MVL is more appropriate for solvent companies with significant assets. Consulting with experts who understand the intricacies of UK tax laws is essential for making informed decisions and ensuring a smooth company closure process.

If you’re considering closing your limited company, reach out to us for personalized advice and assistance tailored to your unique situation. We are here to help you navigate the complexities of tax implications and company closure in the UK.