If you are considering closing down the limited company you have used for contracting, there are different ways of extracting any remaining profits.
Here, Muhammad Dar, a personal accountant at ClearSky Contractor Accounting, explains how capital distributions can work when closing a company.
We’ve updated the original article for the 2025/26 tax year to reflect the increase in the BADR rate from 10% to 14% in April 2025.
Capital distributions on closure
In most cases, the most beneficial way of distributing final funds on company closure is via capital distribution, which is classified as a Capital Gain rather than income.
However, this restricts the total amount that can be taken as a capital distribution without going through a formal liquidation procedure (and with the associated cost) to £25,000.
The benefit here is that each individual has an annual exemption to Capital Gains Tax (CGT) of £3,000 (for 2025/26), with anything above this likely to be taxed at only 14% if Business Asset Disposal Relief (BADR) is due.
A number of criteria must be met before BADR can be claimed, though, so it’s advisable to seek expert advice before making a decision to close the company.
BADR 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.
You can read the official guide (including eligibility requirements) here.
Entrepreneurs’ Relief – name change – and rate changes over time
Business Asset Disposal Relief (BADR) was previously known as Entrepreneurs’ Relief (ER).
The lifetime limit for claims was reduced to £1m in March 2020, and the current CGT annual exemption is £3,000 for 2025/26.
If you qualify, BADR allows you to pay just 14% CGT on qualifying gains when closing your company. The rate will increase again, to 18%, from April 2026.
The approach described above applies when you close your company via a straightforward strike-off at Companies House. In this case, any distributions to shareholders of up to £25,000 can be treated as capital and may qualify for BADR.
If your company has more than £25,000 in retained profits, you will usually need to use a Members’ Voluntary Liquidation (MVL) to achieve capital treatment on the full amount.
An MVL must be carried out by a licensed insolvency practitioner, and involves additional costs, but can be far more tax-efficient if the sums involved are significant.
