Deciding to close a limited company involves a lot of thought, paperwork, and planning. There are several possible exit routes, and every situation is different. Perhaps you will sell your shares to someone else, who will continue to run the business.
Or you may sell the company’s assets and shut down the company.
Once you have decided to wind the company up, some obligations and relationships must be terminated. Whether or not your company is insolvent or solvent, you must finalise your obligations to all customers, suppliers and employees.
A vote must take place before you cease trading to determine if all shareholders with voting rights agree. Once the directors have voted to close down the limited company, they can start preparing final trading accounts.
For corporation tax, once the winding up begins, the current accounting period ends and a new one begins. From this point, the company’s accounting period runs for periods of 12 months until the wind-up process is completed.
To wind up the business, final accounts must be submitted to HMRC along with the CT600 (company tax return) and the computation of corporation tax. You must advise HMRC that these are the final accounts of the business and that the company is to be dissolved.
Keep in mind that, if the final liabilities are not paid in full, HMRC may argue and object to dissolution of the business.
Disposal of shares and/or assets
Many directors may decide to sell their shares. This is known as disposal of shares.
Where shares are disposed of, the sale consideration flows directly to the shareholder. This is different to disposing of assets, where the money will flow to the company and further tax may be payable at the point the money is extracted.
This is effectively a double charge on gains arising in the companies where the money is extracted by shareholders. This has been mitigated over the years by:
- Business asset disposal relief for shareholders in computing their gains on the shares
- The relatively recent reduction in the standard rate of capital gains tax to 18%, and now 10% for basic rate taxpayers
- Indexation relief available up to 31 December 2017 and frozen from that date.
In cases where the vendors are individuals and they want to receive the sales proceeds personally, a simple sale of the company will likely mean lower tax liabilities than a sale of the company’s assets followed by a distribution to the shareholders. This could be in the form of a dividend, winding-up or a mixture of the two.
Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, could be available to some individuals if they dispose of shares in their personal company.
When using the BADR scheme, you must keep in mind that there is a lifetime limit of the amount of BADR available to an individual. The lifetime limit is currently £1million .
Any qualifying gains within the lifetime allowance are charged at a flat rate of 10%. Once the lifetime limit has been hit, any further gains will then incur tax of 20%.
There are some criteria that must be met to qualify for BADR. Both of the following must apply for at least two years up to the date the shares are sold:
- The individual must be an employee or officeholder of the company, or one in the same group
- The company’s main activities must be in trading, or the company is the holding company of a trading group. This means businesses who undertake non-trading activities, such as investment, would not qualify.
There are different rules if the shares are from Enterprise Management Incentive (EMI) schemes.
For at least two years before the sale of the shares, and if they are not from EMI, the business must be a personal company. This means that the individual applying for BADR has at least 5% of both the shares and voting rights. They must also be entitled to at least 5% of either the profits available from distributing the assets or winding up the company, or disposal proceeds if the company is sold.
In circumstances where the number of shares held falls below 5% because the company went on to issue more shares, the individual may still be eligible to claim BADR.
The earlier you plan and prepare the more successful the exit strategy. It’s not uncommon to see the disposals phased gradually over a period. It may take a few years in some cases.
It is always recommended to get expert advice when thinking of disposing a business.
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