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Tax Relief When You Close Your Limited Company

Limited Company

Whether it happens when you retire, because it’s no longer the best way for you to work, or because you’re leaving contracting altogether, if you’re contracting through your own limited company, you will at some point need to close your company down. When the appropriate time arrives, it’s important to be aware of the tax relief potentially available on the final distribution of funds.

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The method you use to close your company will depend on the particular circumstances, and you should discuss this in detail with your accountant before making the decision to close.

How is the final distribution taxed?

Usually, the most beneficial way of distributing final finds on company closure is via capital distribution, which is classified as a capital gain rather than income. This means you would pay Capital Gains Tax (CGT) on the amount distributed to you.  

Each individual has an annual exemption to CGT, which is currently £12,300 (20/21). Anything over this amount will be taxed at the appropriate CGT rate, which can reach 28% for higher rate taxpayers.

Entrepreneurs’ Relief

Entrepreneurs’ Relief (ER) reduces the rate of CGT on qualifying gains to 10%, which could represent a substantial saving. ER can be claimed on the disposal of all or part of a business, shares in the company or business assets after the company has ceased trading.

Who is eligible?

If you hold shares in your limited company, or you’re a sole trader or member of a partnership, then you might qualify. If you’re dissolving your business, you need to dispose of its assets within three years to be eligible. You must have owned at least 5% of the business for two years or more. This is to prevent people from forming companies only to close them soon after and pay less tax.

Entrepreneur’s Relief has recently changed

The lifetime allowance for ER is £1,000,000 (20/21). This was reduced from £10,000,000 effective from 11th March 2020. The Government have stated that 80% of small business owners are unaffected by the change, so the vast majority of contractors will still be covered.

How can you claim?

Most often, your claim for ER will be submitted on your Self-Assessment tax return. If you’re closing your company, your accountant should already be involved, and will be able help and advise you. If you’re lucky enough to be a client of Orange Genie Accountancy, your account will be more than happy to talk through your position in detail and help you complete your claim.

If you have any questions of if we can help in any way, please call our expert team on 01296 468 483 or email info@orangegenie.com.

 

 

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