Closing down a solvent business

When you close down your company, and if there are significant reserves left, you would have been able in the past to to apply for the Extra-Statutory Concession (ESC) C16 with the HMRC and get the distribution taxed as capital instead of income. This would have carried significant tax advantages if you are a higher rate taxpayer since dividends are taxed at 25% or more in that case whereas capital treatment would have potentially allowed access to CGT Entrepreneurs Relief with a tax rate of just 10%.

Since March 1st 2012 however, ESC C16 is no more and has now been replaced by legislation. With a major caveat however. A cap of £25,000 on distributions. If the total reserves available for distribution (excluding capital) breach this cap, the shareholders will then suffer income tax rather than CGT on the entire assets distributed as part of the winding up of the company. That's good news if you have less than £25,000 in retained earnings as it simplifies the winding down process but it's a problem if you have more than £25,000 in reserves.

There is another option however: the Members Voluntary Liquidation (MVL). While an MVL will add complexity and cost (£3,000 or more depending on the insolvency practitioner), it enables the formal winding up of a company’s affairs with all of the assets being distributed in a prescribed order of priority and the distribution, regardless of value, will automatically be a capital distribution in the hands of the shareholders. On top of that, the normal CGT rates will apply, including the potential availability of Entrepreneurs’ Relief subject to meeting the qualifying conditions.