What are the tax implications of closing your limited company?

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on whatsapp
WhatsApp

It seemed like yesterday when you were looking for limited company formation packages. Now you are thinking of closing your limited company. There are many reasons you might to close your limited company. It could be because you’re going to retire or going back into full employment. It could even be because you want to go back to being a sole trader.

So if you’ve been having thoughts like, “how long does it take to liquidate a company?” then you need to know the options you have. It’s important to know what is best for your limited company. This is because you must have the agreement of your directors and shareholders to close it.

How can you close your limited company?

The excitement from choosing the limited company formation packages has worn off, and you must dissolve your company. You need to understand that closing your company depends on whether you can pay your bills. If you can’t pay your bills and become insolvent, you must arrange the liquidation of your company. The interests of the creditors will come first, above all else. If you don’t pay these creditors, a compulsory liquidation will happen. You can avoid this by applying for a Company Voluntary Arrangement.

On the one hand, if you can pay your bills, then there are two methods available for you. First, you can apply to get the company struck off the Register of Companies House. Second, you can start a members’ voluntary liquidation (MVL).

What is an informal (voluntary) strike-off?

One of the cheapest ways to close a limited liability is through a strike-off. This happens when an informal liquidation of your company happens by applying to Companies House to strike it off the register. You can submit your application along with the form DS01 to Companies House.

Take note that the company may not accept your application if, in the last three months, you’ve changed the name, or traded or carried on your business.

But this does not mean that during those three months you can’t undertake any business activity. HMRC allows you to do certain activities even when considering a voluntary strike-off. Examples of these activities include settling trading or business debts, disposing of assets, applying for strike-off, and more.

What are the reasons a limited company cannot apply for the strike-off?

The limited company cannot apply for the voluntary strike-off if it is the subject, or a proposed subject of any insolvency proceedings, and a section 895 scheme. If you breach these restrictions, there will be an imposition of a fine.

What tax do you pay with a voluntary strike-off?

For companies with more than £25,000 retained earnings, all shareholders must pay income tax on the profits at their personal rate. You can speak with an accountant to help reduce the profits to £25,000 or below. This is because the distribution of these profits is often as dividends. The tax rates that will apply are 7.5%, 32.5% or 38.1%. This will depend on the marginal rate of personal tax.

Subsequently, if the profits are below £25,000, all shareholders must pay Capital Gains Tax. The average rate of Capital Gains Tax is 10% for the basic tax rate taxpayer. For the people who pay more than the regular rate of income tax, it’s 20%. However, for those eligible for Entrepreneur’s Relief, they can pay a tax rate of 10%, regardless of the rate of personal tax payments.

If some retained profits are to be a salary for a director, then the amount of tax payment will depend on the director’s personal rate. This is usually bigger than the dividend tax rate.

Thus, consider these tax implications so you can apply for an informal strike-off. It was hard looking for the right limited company formation packages, but now is the time for you to close your limited company.

What is a members’ voluntary liquidation?

When you want to close a solvent company, choose a member’s voluntary liquidation or MVL. Your company’s assets will become cash. There will then be a distribution of the cash to the shareholders. A licensed insolvency practitioner will also carry out the MVL process.

What tax do you pay with an MVL?

Through an MVL, there will be an imposition of a Capital Gains Tax on all distributions to shareholders. This is beneficial since there’s what you call an annual exemption. Through it, there will be a lower taxation rate with Capital Gains Tax compared with income tax. This is also open to those qualified for Entrepreneurs Relief or for basic rate taxpayers. This will provide you with huge savings compared to income tax rates on dividends.

You need to know that aside from Capital Gains tax, the distributions may be subject to income tax in certain situations. The first example would be when the company is a Close Company. The next one would be that within two years after getting distribution, the owner sets up a similar trade. Last, the reason for the winding up of the company is because of the reduction of tax.

So if you want to close your limited company, don’t forget to consider these methods. We know that finding limited company formation packages was hard, but this can be a new beginning for you. Even though you’re closing your company, you can always start a new one. Now, the process is easier with MachFast! You don’t have to resort to complicated or long processes. You just need to download our app for easy company formation. It is available for Android and iOS users, so check it out today.

More to explore

Machfast Application Press Release

Machfast launches the UK’s first free HMRC registered company formation and current account mobile application Easy company formation with a business current