Contractors' Questions: How to take £100,000 out of a company I’m closing?

Contractor’s Question: I have had my own limited company in the IT sector for three years, during which time I’ve built up cash reserves of £100,000. But I was last week offered full-time employment with one of my clients. Assuming I accept the offer, would it be best to keep my company and continue paying myself through dividends or close down the company completely?

Expert’s Answer: In advance of closing the company, you must collect any amounts due to it, settle any liabilities and pay any outstanding taxes.

Once you have settled your taxes – PAYE, VAT and corporation tax – you can inform HM Revenue & Customs that you wish to de-register the company.

From a tax standpoint, the most efficient way to withdraw the £100,000 cash reserves is to close the company and make a capital distribution within three months of ceasing to trade. This would normally attract capital gains tax at 28%. But you should qualify for Entrepreneurs’ Relief, which cuts the CGT rate to 10%. To qualify for Entrepreneurs’ Relief, the company must have traded for at least 12 months and you must own more than 5% of the shares.

Then, a capital distribution must be made through a formal liquidation, as the reserves of the company will exceed £25,000. You will need to appoint a liquidator who will carry out a Members’ Voluntary Liquidation. To do so, you are required to pass a special resolution and make a declaration of solvency.

Although the cost of doing this can be high, you can keep it to a minimum if the company has only cash, shares and distributable reserves. That way, the liquidator will not have to settle liabilities or sell any assets.

The expert was Jon Dawson, partner at Kingston Smith LLP.

Editor's Note: Further Reading -

Unusual Entreprenuers' Relief case is a timely reminder

Contractors' Questions: How to pay a final dividend tax-efficiently?

Contractors' Questions: How to park my company tax-efficiently?

Thursday 7th August 2014