{"id":212,"date":"2021-02-15T02:27:35","date_gmt":"2021-02-15T02:27:35","guid":{"rendered":"https:\/\/guide.no-worries.co.uk\/?post_type=ht_kb&#038;p=212"},"modified":"2025-07-18T01:16:27","modified_gmt":"2025-07-18T00:16:27","slug":"tax-considerations-when-closing-down","status":"publish","type":"ht_kb","link":"https:\/\/guide.no-worries.co.uk\/index.php\/knowledge-base\/tax-considerations-when-closing-down\/","title":{"rendered":"Tax Considerations When Closing Down"},"content":{"rendered":"\n<p class=\"has-theme-default-color has-text-color wp-block-paragraph\" style=\"font-size:22px\">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<h2 class=\"wp-block-heading\" id=\"important\">Important<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A Targeted Anti-Avoidance Rule (TAAR) introduced in Finance Act 2016 prevents \u201cphoenixing\u201d (re-opening and closing companies to obtain tax advantages). A distribution in a winding-up will be taxed as if it were an income distribution where all four of these conditions are met:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>the company is a close company&nbsp;<\/li>\n\n\n\n<li>the individual holds at least a 5% share<\/li>\n\n\n\n<li>on receiving the distribution, the individual (directly or indirectly) continues the same or a similar trade\/activity<\/li>\n\n\n\n<li>one of the main purposes of the arrangements is to obtain a tax advantage.\u00a0<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"brief-background\">Brief Background<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Clients earning c. \u00a3250\u2013\u00a3300 per day for a full tax year often cap their personal income at the basic-rate band to avoid higher-rate tax, leaving retained earnings in the company. From 2025\/26 the basic-rate ceiling remains \u00a350,270 (\u00a312,570 personal allowance + \u00a337,700 basic-rate band), as the income-tax thresholds are frozen until 2028.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"option-1---dividend-payment\">Option 1 &#8211; Dividend Payment<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Once all creditors are paid (usually only Corporation Tax\/VAT), remaining funds can be taken as a normal dividend. Provided your total personal income (including dividends) stays within the basic rate, this remains the simplest route.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Dividend Allowance: now \u00a3500 per person, per tax year.<\/li>\n\n\n\n<li>Basic-rate dividend tax still 8.75 % (higher 33.75 %, additional 39.35 %).<\/li>\n\n\n\n<li>The basic-rate band is not time-apportioned for leavers: if you leave the UK in November you still have the full \u00a350,270 limit for that tax year.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Note \u2013 any dividends declared after formal winding-up begins (i.e. after Companies House acknowledges the DS01) are automatically treated as capital distributions and taxed under Capital Gains Tax rules, not the dividend rules.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"option-2---capital-distribution\">Option 2 &#8211; Capital Distribution<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">If withdrawing retained earnings as dividends would push you well beyond the basic-rate limit, a capital distribution can be far more efficient:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Distributions up to \u00a325,000 after striking-off commences (DS01 acknowledged) are treated as capital gains.<\/li>\n\n\n\n<li>Any surplus above \u00a325,000 must be paid before the closing accounts are prepared and will be taxed as a normal dividend. This is because if the total distributions during the winding-up process exceed \u00a325,000, then the entire amount is treated as an income distribution (dividend).<\/li>\n\n\n\n<li>Where retained earnings exceed roughly \u00a325-30k, a Members\u2019 Voluntary Liquidation (MVL) is usually more efficient because all funds can then be taxed as capital gains rather than dividends (see example below).<\/li>\n\n\n\n<li>CGT changes from 30 Oct 2024: main rates are now 18 % (basic-rate band) and 24 % (higher\/additional) on most assets &#8211; including company distributions.<\/li>\n\n\n\n<li>Annual Exempt Amount (AEA): permanently \u00a33,000 from 2024\/25 onwards.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"entrepreneurs-relief\">Business Asset Disposal Relief&nbsp;<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Using BADR relief, any capital gain extracted from your company is treated in a very tax efficient way. To be eligible;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Company must be a trading company (or holding company of a trading group) for \u2265 2 years up to the disposal date or cessation date<\/li>\n\n\n\n<li>You must be an officer\/employee and hold \u2265 5 % of ordinary shares <em>and<\/em> voting rights<\/li>\n\n\n\n<li>Lifetime limit of \u00a31 million cumulative qualifying gains<\/li>\n\n\n\n<li>Shares must be sold within 3 years of trade ceasing<\/li>\n\n\n\n<li>BADR CGT rate: 14 % on disposals \u2265 6 Apr 2025; rises to 18 % from 6 Apr 2026<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If you intend to wind the company down and keep BADR, mark the date trading stops and plan to complete the MVL or capital distribution <strong>no later than three years<\/strong> after that date.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">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.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Example<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">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<ul class=\"wp-block-list\">\n<li>Retained earnings: \u00a320,000<\/li>\n\n\n\n<li>Maximum dividends of \u00a3500 already taken<\/li>\n\n\n\n<li>Tax band for Jen&#8217;s personal earnings in her permanent role: 40%<\/li>\n\n\n\n<li>\u00a325,000 of distributions paid after winding up proceedings have commenced, are automatically taxed as a capital gain;<\/li>\n\n\n\n<li>So the final payment of \u00a320,000 is taxed as a capital gain;<\/li>\n\n\n\n<li>Capital gains annual exempt amount 2025\/26: \u00a33,000<\/li>\n\n\n\n<li>Actual capital distribution subject to capital gains: \u00a320,000 &#8211; \u00a33,000 =17,000<\/li>\n\n\n\n<li>Capital gains tax at 14%: \u00a317,000 x 14% = \u00a32,380<\/li>\n\n\n\n<li>Overall tax on \u00a320,000 payment: 2,380 \/ 20,000 = 11.9%<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If Jen <strong>doesn\u2019t<\/strong> meet BADR conditions, CGT would instead be \u00a317,000 \u00d7 24% (if a higher rate tax payer) = \u00a34,080 (20.4%).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"important\">IMPORTANT<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Approaching cessation, speak to us before making final withdrawals. Depending on your income mix, a dividend could still be cheaper than a gain, even at the new CGT rates.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"useful-tip\">Useful tip:<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Ask your bank to raise your daily transfer limit before you pay the final Corporation Tax and shareholder distribution \u2013 it avoids last-minute delays.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Considering an MVL?:<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">With the new 14 %\/18 % BADR rates, the \u201cbreak-even\u201d point at which the savings outweigh liquidator fees is now closer to \u00a325 k of retained profits (assuming liquidator costs of c. \u00a33\u20134 k). Let us know early and we can run the numbers for you.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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) introduced in Finance Act 2016 prevents \u201cphoenixing\u201d (re-opening and closing companies to obtain tax advantages). A distribution in a winding-up will&#8230;<\/p>\n","protected":false},"author":2,"comment_status":"open","ping_status":"closed","template":"","format":"standard","meta":{"footnotes":""},"ht-kb-category":[18],"ht-kb-tag":[],"class_list":["post-212","ht_kb","type-ht_kb","status-publish","format-standard","hentry","ht_kb_category-core-info"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Tax Considerations When Closing Down | No Worries Help Centre<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Tax Considerations When Closing Down | No Worries Help Centre\" \/>\n<meta property=\"og:description\" content=\"Proper planning is essential to ensure you close your limited company in the most tax efficient way. We outline two main options below. 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We outline two main options below. Important A Targeted Anti-Avoidance Rule (TAAR) introduced in Finance Act 2016 prevents \u201cphoenixing\u201d (re-opening and closing companies to obtain tax advantages). 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