In the past, incorporating a business was often seen as an automatic way to reduce tax.
But over the years, many of those advantages have been steadily reduced.
With increasing administration, costs, and changing tax rules, more directors are now asking:
Is it time to close the company?
This process is known as disincorporation.
However, while it may simplify things operationally, there are important tax implications to consider — both for the company and for you personally.
Let’s take a look at the key issues.
What Happens to Company Assets?
When a company closes and its assets are transferred to the director or shareholder, HMRC generally treats this as if the company has sold those assets at market value.
Even if no money changes hands, the transfer is treated as a disposal.
This can trigger:
- Capital allowances adjustments
- Balancing charges
- Taxable gains
Capital Allowance Assets – An Election May Help
For plant and machinery (assets within the capital allowances regime), it may be possible to avoid a balancing charge or allowance.
Where a business succession takes place between connected parties, the company and the individual can make a joint election.
This election allows the assets to transfer at their tax written-down value, rather than market value.
A few key points:
- The election must be made jointly
- It must be submitted within two years of the business succession
- The new business carries forward the written-down value into its capital allowance pool
This can prevent an unexpected tax charge when transferring equipment or machinery.
Transferring Stock
Stock is also treated as transferred at market value by default.
However, a joint election can usually be made so that stock transfers at:
- Its actual transfer value, or
- If higher, its book value
This can help avoid unnecessary tax charges when a company closes.
Goodwill and Other Capital Assets
One of the biggest hidden costs in disincorporation is often goodwill.
If the company has built up value over time — such as reputation, client relationships, or brand strength — that goodwill is treated as a capital asset.
When transferred to the new business, HMRC usually taxes it as a chargeable gain at market value, because the transaction is between connected parties.
Unlike plant and machinery, there is no relief available to defer or hold over this gain.
For many companies, this goodwill tax charge can be the largest disincorporation cost.
Stamp Duty Land Tax (SDLT)
If the company owns property and transfers it to a connected person (such as a shareholder becoming a sole trader), HMRC treats the transfer as taking place at market value.
However, in some cases, SDLT may not apply if the property is transferred as a distribution in specie (a non-cash distribution), provided:
- The property is not subject to a loan
- The transfer does not create a debt
If there is a third-party mortgage or secured loan, SDLT may still be payable if the shareholder assumes responsibility for that debt.
VAT Considerations
Normally, when a VAT-registered business ceases trading, it is treated as making a taxable supply of goods still held.
But when a company trade transfers to a sole trader, the transfer may qualify as a Transfer of a Going Concern (TOGC).
If TOGC applies, no VAT is charged on the transfer.
This is an important area to get right, especially for asset-heavy businesses.
Withdrawing Remaining Cash
When closing a solvent company, you’ll also need to decide how to extract any remaining funds.
This usually comes down to:
- A dividend, or
- A capital distribution
If the total amount paid to shareholders on closure is less than £25,000, it may qualify as a capital distribution, taxed under CGT rates (18% or 24% in 2025/26).
If the amount exceeds £25,000, the payment is normally taxed as income at dividend tax rates, after considering the £500 dividend allowance.
The timing and method can make a big difference to the final tax bill.
Thinking About Disincorporation?
Disincorporating may simplify your business structure — but the tax implications can be complex, and goodwill or property transfers can lead to unexpected charges.
At Jon Davies Accountants, we can help you assess whether disincorporation is worthwhile and guide you through the process in the most tax-efficient way.
Get in touch with Jon or the team today for tailored advice before making any big decisions.
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Any questions?
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