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If I want to close down my limited company, can I extract any remaining profits tax efficiently?
Posted Jan 27, 2012
If you are considering closing down the company you have used for contracting, for whatever reason, Derek Kelly, MD of ClearSky Accounting gives some advice on how any remaining profits can be extracted in a tax efficient way.
"Perhaps the best option in this instance is to apply to HMRC for their agreement to an Extra Statutory Concession C16 (ESC C16) which allows the final funds in a company to be treated under the Capital Gains Tax (CGT) regime for each shareholder.
"The benefit here is that each individual has an annual exemption to CGT of £10,600 (for 2011/12) with anything above this likely to be taxed at only 10% if Entrepreneurs Relief (ER) is due. There are a number of criteria to be met before ER can be claimed though so it's advisable to seek expert advice before making a decision to close the company.
"If the company ceases to trade after 1 March 2012, new rules come into force which are set to limit the amount that can be distributed in this way to £25,000. If the company has significant retained profit then an insolvency practitioner will be able to formally liquidate the company and still treat all of the funds under the rules for CGT, but it is likely that additional fees to close the company will be incurred.
Further Information
For more information on HMRC's changes to ESC C16 from 1st March 2012, read this latest update.
Entrepreneurs' Relief may apply to any remaining company profits if you close your company down, however a number of conditions need to be met. For example, you must have held the shares for at least 12 months prior to the disposal. Fortunately, the lifetime limit for claims under the ER regime was raised to a healthy £10m from April 2011, which should be more than adequate for most contractors' needs.
Read more in our summary here.
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