If you are considering closing down the company you have used for contracting, for whatever reason, Muhammad Dar, a personal accountant at ClearSky Contractor Accounting gives some advice on how any remaining profits can be extracted in a tax-efficient way.
“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 £12,300 (for 2020/21), 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.
“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.”
* Please Note: Since this article was published, the lifetime limit for ER claims has been reduced to £1m for qualifying disposals made after 11th March 2020.
For further information, read our concise guide to Entrepreneurs’ Relief here.
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