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Whatever the reason, you have a number of different options when closing down your company and these should be considered carefully to ensure you are keeping the shareholders' best interests at heart.Liquidation
This is the formal process of winding up your company. To go into liquidation you need to find and appoint a qualified liquidator.
Once a liquidator is appointed they essentially take over the running of the company and become the beneficial owner of the company's assets. Their duty is to wind down and stop any trading activities of the company, settle all the outstanding liabilities, such as trade creditors, loans, and sell all the company's assets. The result of this activity is to turn the company's value into cash which can then be distributed to the shareholders before the company is dissolved.
By taking a company into formal liquidation you are ensuring that the distributions of cash (or sometimes assets) to the shareholders can be treated as capital distribution.
For UK shareholders this means less tax. Pre-liquidation distributions (dividends) will be taxed as income. Dividend tax levels as of 2016/17 are 0% on the first £5,000, 7.5% on income between £5,000 and £32,000, 32.5% on dividends between £32,001 and £43,000 and 38.1% thereafter. In contrast capital distributions will attract capital gains tax at the 2016/17 rates of 10% up to £32,000 and 20% thereafter (after applying any remaining annual exemption of £11,100).
To illustrate this, let's look at a dividend distribution of £200,000 when taxed as income or as capital.
As you can see, the tax on a large distribution such as this is nearly half when it has been completed through a formal liquidation.
Other factors to consider when looking at liquidation is how much this will cost the company in liquidator fees. Generally fees can start from £3,000-£4,000 but this will depend on the company and any complexities which may exist.Informal Winding Up
If your company is quite small in value and you believe the tax benefits of a formal liquidation may be outweighed by the cost of hiring a liquidator, you do have another option. This is provided by s1000 or s1003 of the Companies Act 2006.
In this scenario it would be your responsibility to cease to trade, settle all liabilities and sell or transfer any company assets. You will then be left with your distributable reserves that will be paid to the shareholders.
This distribution may also be treated as capital rather than income if the following conditions are met:
However, the amount that can be treated as capital for tax purposes is £25,000. If this cap is exceeded the excess will be taxed as income.Other Considerations
As of April 2016 anti-avoidance legislation came into force to stop entrepreneurs from repeatedly benefiting from capital distributions on dissolution of a company.
If within the next two years after a company is dissolved, the same shareholder(s) set up a similar business in the same industry but in a new company, HMRC may look back at previous capital distributions and reclassify them as income, therefore collecting the difference between the tax paid and the tax payable had the distribution been taxed as income. Additional tax due would also attract interest.
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1 - Assuming the exemption has not been used against other capital gains in the year