Closing Your Company

Closing Your Company

When closing a limited company, one of the main considerations is how to extract any money that remains in the business. Depending on how the company is closed, the amount received by shareholders may be subject to Capital Gains Tax rather than Income Tax, potentially making a significant difference to the tax payable.

Closing a company tax efficiently

When a company goes into voluntary liquidation, shareholders can receive the surplus assets of the company as a capital distribution instead of as a dividend.

The advantage is that the money is treated as a capital gain on the shares, rather than dividend income. Capital Gains Tax rates are generally lower, and the saving can be greater still if the shareholders qualify for Business Asset Disposal Relief.

For companies with no more than £25,000 to distribute, it may be possible to secure capital treatment by simply having the company struck off the Companies House register. Where larger amounts are involved, a formal Members’ Voluntary Liquidation will normally be required. This involves appointing a liquidator, so the costs need to be weighed against the potential tax saving.

Simply agreeing to receive payment by instalments does not automatically defer the tax. There are ways to deal with this, including taking some of the consideration in the form of loan notes. Depending on the arrangements, this may allow the tax liability to be postponed until the notes are redeemed. We can advise on the tax treatment of the proposed sale and whether changes to the terms would be beneficial.

There are also tax implications when transferring an existing business into a company. The transfer of business assets can give rise to capital gains tax, although Incorporation Relief may allow the gain to be deferred. From 6^th April 2026, this relief must be claimed rather than being given automatically.

Tax Innovations can assess whether incorporation would be beneficial, when it should take place and how the transfer should be carried out.

Anti-avoidance rules

There are rules to prevent company owners from closing a business simply to extract accumulated profits at Capital Gains Tax rates, rather than paying themselves dividends.

In particular, HMRC may challenge the capital treatment where a shareholder continues to carry on the same or a similar business within two years of receiving the distribution, and reducing Income Tax was one of the main purposes of winding up the company.

This does not necessarily prevent you from starting another business, but the circumstances need to be considered carefully. The rules can apply even where the new business is operated through a different company.

If you are considering closing your company, Tax Innovations can review the available options and establish whether capital treatment is possible, including any entitlement to Business Asset Disposal Relief. We can also advise on potential anti-avoidance issues before any distributions are made.