Keep cost of liquidation to a minimum
HA writes: I have been running my IT business through a limited company for three years and have built up cash reserves of £100,000. I have recently been offered full-time employment with one of my clients. Should I keep my company going and continue to pay myself a dividend or is it best to close it down?
Before you close the company, you must collect any amounts due to it, settle any liabilities and pay any outstanding taxes, writes Jon Dawson, partner at Kingston Smith LLP. Once you have settled your taxes – PAYE, VAT and corporation tax – you can inform HM Revenue & Customs you wish to de-register the company. You should also cancel any contracts that you no longer need, such as web hosting and insurance.The most tax efficient way to withdraw the cash reserves is to close the company and make a capital distribution within three years of ceasing to trade. This would be subject to capital gains tax at 28%. However, you should qualify for Entrepreneurs’ Relief, which cuts the tax rate to 10%. To qualify for this, the company must have traded for at least 12 months and you must own more than 5% of the shares.
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 will need to pass a special resolution and make a declaration of solvency. The cost of doing this can be high, but 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 sell any assets or settle liabilities.