How To Pay The Least Tax Closing A Limited Company
If you’re looking to close your limited company, there’s no doubt you’ll be wanting to do so in the most tax-efficient way possible. If you’re wondering how to pay the least tax closing a limited company, then you need to make sure that you choose the best method for liquidating your business. Providing your company is still solvent (i.e its assets are greater than its liabilities) there are two main methods in which you can close a limited company. These are a Voluntary Strike Off or a Members’ Voluntary Liquidation (MVL).
Voluntary Strike Off
You can apply to get your company struck off the Companies House Register by submitting a form DS01 that has been signed by the company directors.
Closing your company in this way can have advantages, however, when it comes to deciding how to pay the least tax closing a limited company, Voluntary Strike Off isn’t likely to be the best option. Why? Well, that’s because the amount of tax you’ll be required to pay will depend on your final cash reserves.
If the final reserves you take out are less than £25,000, then all shareholders will pay Capital Gains Tax (CGT). This is a lower rate than income tax and so better for your finances. However, if the final profits are above £25,000 they will be subject to income tax which will be higher in rate. This means that if you close your company via a Voluntary Strike Off and your final exceed £25,000, you could be at risk of paying excessive amounts of tax.
That’s why, if your company has a lot of retained profits then it’s always best to consider an MVL instead.
Members’ Voluntary Liquidation (MVL)
When thinking about how to pay the least tax closing a limited company, an MVL will be the most tax-efficient method in almost every case. An MVL closes a limited company and distributes the remaining assets to shareholders as cash. The process is led by a licensed insolvency practitioner who will ensure the company is wound up correctly and that cash and assets are extracted in the most tax-efficient way.
Rather than extracting the remaining profits as a final dividend that is subject to income tax, the profits are distributed to shareholders as a capital gain, and so are subject to CGT, the lower rate of tax. Unlike in a Voluntary Strike Off, final reserves that exceed £25,000 do not become disqualified from CGT or counted as income. This means that in an MVL, you can extract more retained profits whilst still paying the lower rate of CGT as opposed to income tax. And that’s not the best part…
When you close your limited company via an MVL you may also qualify for Business Asset Disposal Relief*. This means that shareholders will only have to pay a significantly reduced tax rate of 10% on any funds or assets distributed to them.
Whilst the process of an MVL will cost more than a Voluntary Strike Off, when it comes to determining how to pay the least tax closing a limited company, the advantages of an MVL outweigh that of a strike off.
If you are considering closing your company via an MVL, please don’t hesitate to get in touch with our experienced team who will be happy to answer any questions you may have and guide you through the process.
*Please note that prior to the 2020/2021 tax year, Business Asset Disposal Relief was formerly referred to as ‘Entrepreneurs Relief’.
