If you are thinking of ceasing trading with your limited company, then you need to consider the options available to close the company and take out the profits tax efficiently.
It is worth getting advice as to the most tax efficient way to close your company as it will depend on your individual circumstances. Before you even consider closing your limited company, you should consider if you could sell the company or pass it onto a family member.
There’s much more to closing your company than just closing the doors and walking away. What you shouldn’t do is merely close your limited company or cease trading without thought as this will give you issues around tax and accessing your business bank account.
In this blog we will look at the most tax-efficient and suitable way to close your limited company, pay outstanding tax liabilities and tax efficiently extract the profit left.
Reasons why you may consider closing a limited company
There may be a variety of reasons to consider closing your company and before you do, seek professional advice as there may be options you haven’t considered. Some of reasons people decide to cease trading are:
- The business is no longer profitable or viable.
- You are taking a permanent role as an employee.
- You have decided to retire.
- You have decided for lifestyle reasons.
- The limited company structure no longer suits you from a tax or admin point of view.
Finding the most tax efficient method to close a limited company
The two main ways to close a limited company are:
- Members’ voluntary liquidation.
- An informal or voluntary strike-off.
You could also make your limited company dormant if you think you may want to use it again in the future.
Whatever way you close a company you could opt to take the remaining profit as a dividend. However, you will pay tax on the dividend amount at the normal rate and therefore may not be the most tax efficient option for you.
What is an MVL?
A Members Voluntary Liquidation (MVL) is the formal process to wind up the affairs of a solvent company. A solvent company is one that has more assets than liabilities and can pay off all its debts.
With an MVL, instead of taking the retained profits as a final dividend, the profits are distributed to shareholders as a capital gain, and so are subject to CGT. This can mean a much lower final tax bill if you also qualify for entrepreneurs’ relief.
If you have cash reserves over £35,000, you could extract the profits whilst paying tax at a rate of just 10% by using an MVL. This allows you to close your limited company in the most tax efficient manner.
If you decide to liquidate your company using a licenced insolvency practitioner then your remaining reserves will be distributed as capital and subject to Capital Gains Tax (CGT).
You will have to pay the insolvency practitioners fee, but overall it can work out much less costly.
Benefits of a Members Voluntary Liquidation (MVL)
One of the big benefits of using an MVL is that it utilises Entrepreneurs’ Relief. Providing you qualify, this could mean you pay CGT at a rate of just 10% on qualifying assets.
As a shareholder you could also be entitled to a tax-free allowance of £12,300.
However, seek advice as MVL funds could be subject to income tax under certain conditions such as:
- Your company has five shareholders or fewer.
- You are involved in a similar trade or activity within two years.
- The primary aim of your MVL appears to tax avoidance.
Qualifying criteria for Members Voluntary Liquidation
In order to utilise an MVL you need to meet the following criteria:
- After paying all liabilities, you have company reserves over £25,000 (although taking into account liquidators fees to undertake an MVL cash reserves over £35,000 is normally a good benchmark for it be most cost effective).
- The company has been trading for at least 12 months.
- You are at least a 5% shareholder and employee of the company.
- You aren’t intending on trading via a limited company for at least two years following the MVL (see tax avoidance section below).
Things to do before beginning an MVL process
You must ensure the following things are in order before embarking on an MVL process:
- final accounts are up to the date the company ceased to trade are prepared.
- all creditors to be paid.
- any physical assets to be disposed of.
- any outstanding charges to be satisfied.
- the final VAT return and Corporation Tax Return to be submitted.
- if any liability is owed to HMRC after the submission of these forms, this will need to be paid.
The pros and cons of an MVL
Pros are: It is usually much more tax-efficient than other methods of closing a company if you have large retained profits.
Cons are: It can take longer for an MVL process, and you’ll need to pay an insolvency practitioner.
Informal or voluntary strike off
An alternative to an MVL is an informal or voluntary strike off. You can apply to Companies House to have your company struck off the register. This is called an ‘informal strike-off’ or ’voluntary strike off’. It is a formal process but is different to a compulsory strike off where you are forced by a third party to cease trading.
How to apply for voluntary strike-off
Prior to undertaking a voluntary strike-off, your company must have been inactive for at least three months. You will be able to continue to carry out a limited range of activities such as settling debts, complying with statutory requirements, and disposing of certain business assets (excluding stock). To apply for your voluntary strike-off, you need to submit form DS01 to Companies House.
Taking profit from your company in a voluntary strike-off
Any retained profits, you can take as a dividend, and/or director’s salary. But this isn’t always the most tax efficient option compared to an MVL.
What tax do I pay in a voluntary strike-off?
The amount of tax you pay will depend on a number of things.
You will pay Capital Gains Tax (CGT) if the final profits are £25,000 or less. CGT is 10 per cent for a basic rate taxpayer and 20 per cent for a higher rate taxpayer; however, if you qualify for entrepreneurs’ relief it will be 10 per cent.
For profits total more than £25,000 then they are subject to income tax. The rate of tax payable depends on your personal rate of tax and whether profits are taken as salary or dividends or a combination of the two.
Making your company dormant
If there is a possibility that you may want to trade again as a limited company in the future, you should make your company dormant. This means it is no longer actively trading but continues to be listed at Companies House and can be used at a later date. This allows you to retain the company name for future use and means you won’t have to re-register a new company again if you wish to begin trading again.
Closing an insolvent company
If your company is unable to pay its bills, then this is a very different scenario to the options above. You company is deemed insolvent if you can’t meet your liabilities. If this is the case your creditors (the people the company owes money to) will take legal priority over the shareholders and directors in having access to any company funds that are left.
If liquidation is the only option, then it’s best to consider a Creditors Voluntary Liquidation (CVL). You will need to appoint an insolvency practitioner.
A Company Voluntary Arrangement can help you to avoid liquidation. This arrangement agrees to pay as much of your debts as possible to avoid or postpone final liquidation.
A compulsory liquidation is where your creditors force you into liquidation to recover their money from your company.
What is the most tax efficient way to close your limited company?
When closing down a limited company, many people believe that taking remaining profit as a dividend is the quickest and simplest way to extract profits. However, you will pay tax on the dividend amount at the normal rate.
You need to seek professional advice and consider all your tax options before you decide to close a limited company.
Whatever the reason for considering closing your limited company, we have experts that will advise and help you to close your company as quickly and tax efficiently as possible.
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
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