Closing a UK Limited Company: Tax Rules and Methods
Closing a UK limited company involves choosing between informal strike-off and MVL to manage Capital Gains Tax and Business Asset Disposal Relief on your final reserves.
Yes, you must pay tax when closing a limited company if you extract any remaining monetary reserves or physical assets. The rate of tax you pay depends on whether the funds are distributed as capital or income, which is determined by the closure method you select.
Key Takeaways: Tax on company closure in 2026/27
- Companies with reserves under £25,000 can use an informal strike-off to treat distributions as capital.
- Companies with reserves over £25,000 must use a Members' Voluntary Liquidation (MVL) to receive capital treatment.
- The standard Capital Gains Tax (CGT) rates for 2026/27 are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
- Business Asset Disposal Relief (BADR) reduces the tax rate to 18% on qualifying lifetime gains up to £1 million.
- The annual individual CGT tax-free exemption limit is set at £3,000 for the 2026/27 tax year.
If I close my limited company do I have to pay tax?
You must pay tax on any final business distributions, though qualifying capital distributions offer significantly lower tax rates than normal income withdrawals.
When wind-up proceedings begin, any cash or assets left in your business must be formally distributed to shareholders. If you do not follow specific statutory closure routes, HM Revenue and Customs (HMRC) will treat these final payments as dividends, subject to income tax rates up to 39.35%.
By executing a formal company closure, you can legally convert these distributions into capital gains. This allows you to apply your annual Capital Gains Tax allowance and potentially qualify for preferential relief rates.
How do you close a limited company and take money out?
You can extract funds either through an informal strike-off or a formal Members' Voluntary Liquidation, depending on your total remaining business reserves.
The statutory limit dividing these two methods is £25,000. This threshold dictates whether you can handle the process yourself or must appoint a licensed professional to liquidate the firm.
| Feature | Informal Strike-off | Members' Voluntary Liquidation (MVL) |
|---|---|---|
| Reserves Limit | £25,000 or less | Over £25,000 |
| Governing Law | Section 1030A Corporation Tax Act 2010 | Section 1030 Corporation Tax Act 2010 |
| Tax Treatment | Capital Gains Tax (under £25,000 limit) | Capital Gains Tax (unlimited reserves) |
| Liquidator Required | No, managed by directors | Yes, requires a Licensed Insolvency Practitioner |
What is the tax to pay when closing a limited company?
The tax you pay is based on the 2026/27 Capital Gains Tax rates, which vary depending on your income band and relief eligibility.
For the 2026/27 tax year, Capital Gains Tax rates are structured around your total personal income and the availability of Business Asset Disposal Relief. Every individual also receives a small yearly tax-free allowance before any tax becomes payable.
| Tax Scenario | 2026/27 Tax Rate | Exemption Allowance |
|---|---|---|
| With Business Asset Disposal Relief (BADR) | 18% | £3,000 |
| Basic-Rate Taxpayer (Without BADR) | 18% | £3,000 |
| Higher-Rate Taxpayer (Without BADR) | 24% | £3,000 |
How do you qualify for Business Asset Disposal Relief (BADR)?
To qualify for the 18% BADR rate, you must meet strict statutory criteria regarding ownership, role, and trading history before company closure.
- You must hold at least 5% of the ordinary share capital and voting rights in the company.
- You must be an active director or employee of the limited company.
- The business must be a personal trading company, rather than an investment vehicle.
- You must meet all of these qualifying conditions for a minimum of 2 consecutive years before the trading activities cease.
- You must claim the relief and distribute the company assets within 3 years of the business ceasing to trade.
- Your total lifetime gains qualifying for this reduced rate must not exceed £1 million.
Example: Calculating tax implications of closing a limited company
This calculation compares the tax impact of extracting £90,000 using an MVL with BADR eligibility versus extracting it without BADR.
The following illustration assumes an original share cost of £1. It shows how qualifying for the special relief rate protects your final distribution from the higher 24% tax band.
| Calculation Step | With BADR (18%) | Without BADR (24% Higher Rate) |
|---|---|---|
| Total Reserves Distributed | £90,000 | £90,000 |
| Less: Original Share Cost | (£1) | (£1) |
| Less: 2026/27 CGT Allowance | (£3,000) | (£3,000) |
| Total Taxable Capital Gain | £86,999 | £86,999 |
| Tax Due to HMRC | £15,660 | £20,880 |
Watch out for the anti-avoidance rule (TAAR)
The Targeted Anti-Avoidance Rule (TAAR) allows HMRC to reclassify your capital distribution as dividend income if you resume similar business activities.
This anti-fraud law prevents a practice known as 'phoenixing', where owners close a company simply to extract cash at lower capital gains rates, only to start a new company doing the same work. Under these rules, if you start a similar trade or business within 2 years of receiving the capital distribution, the money is taxed as a dividend at rates up to 39.35%.
What is the difference in tax when closing a business with under £25k vs over £25k in reserves?
Under £25,000, you can use a cheap, informal strike-off and automatically receive Capital Gains Tax treatment. Over £25,000, you must use a formal Members' Voluntary Liquidation (MVL) to get Capital Gains Tax treatment; otherwise, HMRC treats the whole amount as dividend income.
Does BADR apply to assets if I close my limited company and start a similar business?
No. If you start a similar business or trade within 2 years of the distribution, the Targeted Anti-Avoidance Rule (TAAR) applies. HMRC will disqualify your BADR claim and tax the distribution as dividend income instead.
How does the annual CGT exempt amount apply to company closure distributions?
The annual Capital Gains Tax exempt amount of £3,000 for the 2026/27 tax year is deducted from your total capital distribution before any tax is calculated. This tax-free allowance applies per individual, not per business.
Can you claim tax relief on closing a limited company if your company is an investment vehicle?
No. To qualify for Business Asset Disposal Relief (BADR), your business must be a trading company. Investment holding companies do not qualify, meaning final distributions are taxed at standard Capital Gains Tax rates.