Proper planning is essential to ensure you close your limited company in the most tax efficient way. We outline two main options below.<\/p>\n\n\n\n
A Targeted Anti Avoidance Rule (TAAR) was published in the Finance Act 2016 in order to prevent people from opening and closing a company to gain a tax advantage.
In order to combat phoenixing, a distribution from a winding-up will be taxed as if it were an income distribution, where the following four conditions are met:<\/p>\n\n\n\n
Clients who earn more than approximately \u00a3250-\u00a3300 per day for a full tax year often find when they come to close their company down there are retained earnings held in their ltd company bank account. This arises when they choose to keep their gross personal earnings below the basic rate limit of \u00a350,270 (\u00a312,570 + \u00a337,700) each personal tax year \u2013 and so instead of paying out the maximum permissible amount from their company, they cap their earnings at the basic rate limit, allowing excess funds to be retained in their company bank account.<\/p>\n\n\n\n
Once the company has paid all its creditors (usually only Corporation Tax\/VAT), any remaining funds are paid out as a normal dividend payment. So long as the clients gross personal earnings for the current tax year does not exceed the basic rate limit, this is by far the best and easiest option.
This usually works if the client is closing down their company and leaving the UK, or else if the retained earnings is small. Note the basic rate limit is not reduced on a pro rata basis from the date of leaving the UK, so if you leave the UK at the end of November for example, you still have the entire tax year basic rate limit of \u00a350,270 available to you.
Note that dividend payments you make to yourself once winding up proceedings have commenced will be taxed as a capital gain \u2013 please see below.<\/p>\n\n\n\n
If your earnings for the current tax year will exceed the basic rate limit by an unacceptable amount (in terms of dividend top-up tax you will have to pay), then being taxed under the capital gains regime is a very tax efficient way of extracting any retained earnings from your company. The final distribution is taxed as a capital gain, rather than a normal dividend. There are a few points to note here;<\/p>\n\n\n\n
Using BAD relief, any capital gain extracted from your company is treated in a very tax efficient way. To be eligible, broadly speaking you must have traded through your company for more than two years, whilst also being a Director, and at least a 5% Shareholder. You need to be careful about taking any funds from your business bank account when approaching your end of trading. It may not be beneficial to have final payments taxed as a capital gain \u2013 please speak with your account manager about this.<\/p>\n\n\n\n Get in touch with your bank, and get your daily transfer limit increased, this will be very handy when you need to pay your final Corporation Tax, and final distribution to the shareholders.<\/p>\n\n\n\n If you expect to have more than \u00a336,000 in retained earnings, please let us know and we can help advise you on the Members Voluntary Liquidation route.<\/p>\n","protected":false},"excerpt":{"rendered":" Proper planning is essential to ensure you close your limited company in the most tax efficient way. We outline two main options below. Important A Targeted Anti Avoidance Rule (TAAR) was published in the Finance Act 2016 in order to prevent people from opening and closing a company to gain…<\/p>\n","protected":false},"author":2,"comment_status":"open","ping_status":"closed","template":"","format":"standard","meta":{"footnotes":""},"ht-kb-category":[18],"ht-kb-tag":[],"_links":{"self":[{"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/ht-kb\/212"}],"collection":[{"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/ht-kb"}],"about":[{"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/types\/ht_kb"}],"author":[{"embeddable":true,"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/comments?post=212"}],"version-history":[{"count":2,"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/ht-kb\/212\/revisions"}],"predecessor-version":[{"id":436,"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/ht-kb\/212\/revisions\/436"}],"wp:attachment":[{"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/media?parent=212"}],"wp:term":[{"taxonomy":"ht_kb_category","embeddable":true,"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/ht-kb-category?post=212"},{"taxonomy":"ht_kb_tag","embeddable":true,"href":"https:\/\/guide.no-worries.co.uk\/index.php\/wp-json\/wp\/v2\/ht-kb-tag?post=212"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
If you are not eligible and have a significant sum of retained earnings in your business, then any capital gains you extract may be taxed at a higher rate than dividends (Option 1 above). If this applies to you speak to your account manager to discuss the most tax efficient routes available to you.
Example:<\/strong>
Jen is a lawyer with her own limited company, Jen the Lawyer Limited. After contracting for 30 months she decides to take a permanent position in the UK. She has \u00a320,000 in retained earnings in her company bank account, and her personal earnings for the current tax year sits at the basic rate limit (so Option 1 above will not work for her).<\/p>\n\n\n\n\n
IMPORTANT<\/h2>\n\n\n\n
Useful tip:<\/h3>\n\n\n\n