HMRC help - closing down limited company

LionAquaLooper · September 2023

I have a dormant limited company from when I was a contractor, and I've still got money left in my business bank account. I'm intending to close down my business since I don't need it anymore but just saw the massive divident tax rate I'll be facing if I take out my business funds as a dividend. Anybody else have this quandary before, and how did you go about it? Any advice would be most appreciated!

Axe_meister · September 2023

Could you not slowly close the company down, i.e. pay yourself a small salary every month out of the account (yes it will be at your current PAYE tax rate), until drawn down to zero.

Dr_Necessiter · September 2023

If it's a significant sum, spending a couple of hundred on specialist advice would be the way to go. I'd investigate ex gracia payments:

https://redmans.co.uk/insights/ex-gratia-payments-to-employees-a-quick-guide/

Another angle could be to do some research around awarding yourself a one-off bonus paid into your pension (or the one you're about to get)

. You can stash £40K or so per year tax free and add in a previous year's (perhaps two previous years) allowance if you didn't use it.

At 55 (or over) you can draw down 25% of the pension pot tax-free but the rest is charged at 40% if drawn down in one go or it adds to your personal income if drawn down incrementally.

Axe_meister · September 2023

You can now stack 60K into your pension and no upper limit on pension size.

TTony · September 2023

Dr_Necessiter said:

If it's a significant sum, spending a couple of hundred on specialist advice would be the way to go.

Exactly that.

It depends on how much is still in the Company. If it’s £500k, then you need proper advice. If it’s £50k then you might be able to put that into pensions (depending on what you already saved), but I’d still check with your Accountant. If it’s £5k, have a party Board Meeting somewhere nice.

Fishboy7 · September 2023

I'm about to close mine down but have had a balance of exactly £0 for the last co year so should be a bit simpler.

I'm annoyed I didn't do it sooner as ended up having to pay for various accounting stuff since IR35

khaotic · September 2023

When I closed mine down, the accountant gave me worked examples for dissolution vs liquidation.

Basically boiled down, based on tax rules at the time, to be much cheaper to go the dissolution route for the amount of money I had in the company (<£100K).

Dissolution option:

1, Take max dividend allowance for all shareholders

2. Max out pension contributions including an un-maxed from previous 2 years (this was a big win for me)

3. plus additional corporation tax relief on pension contributions

4. Distribute the remaining capital

5. Pay CGT on (4) minus any remaining CGT allowance, but at 10% claiming entrepreneur relief

6. Accountancy costs ~£900

Total extracted was slightly more than the amount I started with

Liquidation option:

1, Take max dividend allowance for all shareholders

2. Distribute the remaining capital

3. Pay CGT on (2) minus any remaining CGT allowance, but at 10% claiming entrepreneur relief

6. Accountancy costs ~£4500

Total extracted would have been about 90% of what I started with. Looking back, I have no idea why I couldn't also use the pension option with this one. From what I recall, this option gets more viable the larger the pot you have to start with

Take all this with a pinch of salt - this was done 5ish years ago, and tax rules have undoubtedly changed since. Consult your accountant!

SteveRobinson · September 2023

I was researching this very topic yesterday, it seems like the best way is an MVL (members voluntary liquidation) and you get all your money out, less 10% capital gains. I've yet to ask my accountant though...

LionAquaLooper · September 2023

Thanks to all for the advice so far. I spoke to an accountant (not mine because mine is useless at replying) and this is what she said about the pension route

"You could make a company pension contribution into a pension scheme. The pension scheme will receive the same amount as is paid by the company without any tax relief.

Normally a trading company would pay the amount in and get the same amount as a deduction against its corporation tax, but as the company finished trading a couple of years back, no tax relief is available."

I don't completely understand everything she said there but based on the last sentence it looks I may not be afforded tax relief because my company is dormant? In which case best bet might be closing down and paying CGT like others have said already.

@khaotic - by definition what is the difference between dissolution and liquidation? And why is there such a big difference in accountancy costs??

musteatbrain · September 2023

Are the pensions rules the same if you are a self-employed or a sole trader rather than a limited business?

I know someone who has sold up and is trying to be more tax efficient with the way they deal with their final year’s profit

khaotic · September 2023

@khaotic - by definition what is the difference between dissolution and liquidation? And why is there such a big difference in accountancy costs??

It's a legal thing dependent on the status and size of the company - the cost differential is because of the requirement to use a licensed liquidator/insolvency practitioner for the liquidation option.

There some blurb I've found here: https://www.forbesburton.com/lp14 and here: https://www.theinsolvencyexperts.co.uk/blog/liquidation-vs-dissolution/ which explains the options

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HMRC help - closing down limited company

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