A company has ceased trading and the director is looking to shut it down. They are not sure whether to strike the company off or have it liquidated. What are the differences, and which option will be best for your client?
Introduction
The client is the sole director and shareholder of a personal service company that provides property consultancy services. They have decided to retire, and with no succession in place will be shutting the company down. The assets of the company consist of £50,000 cash, and a modest office building worth approximately £200,000 where your client traded from. The company has no debt. While both liquidation and strike off achieve the same result (removal of the company from the register at Companies House), the client is unsure which method to choose and whether one would be better from a tax perspective.
Liquidation
In order for the client to put their company into a members’ voluntary liquidation (MVL), they must first hold a board meeting (in their capacity as director) and swear a declaration of the company’s solvency before calling for a shareholders’ meeting. The client (now in their capacity as a shareholder) then needs to pass a resolution to place the company into liquidation and appoint a licensed insolvency practitioner.
Pro advice. The resolution is a special resolution requiring at least 75% of the shareholders’ votes.
The job of the liquidator is to then realise the company’s assets, ensure all of the creditors are paid off, and then distribute the surplus assets to the shareholders. However, before the liquidator can distribute the assets, their appointment must first be advertised in the London Gazette in order to allow potential creditors to submit claims against the company. The liquidator can then distribute assets 21 days after publication.
Once all assets have been distributed, the liquidator will finalise the company’s tax affairs with HMRC, circulate a final account to the shareholders, and file a return with Companies House which will result in the company being removed from the register three months later.
Pro advice. Once wound up, the company cannot (except in extremely exceptional circumstances) be reinstated to the register.
Statutory interest
In 2016, statutory interest to liquidation debts was introduced to ensure creditors receive interest on their debts during the insolvency process. The rate is 8% and is payable to creditors on their outstanding debts from the date the company entered liquidation until the date the debt is paid. While your client may not think they have any creditors, HMRC will be a creditor in respect of any unpaid tax liabilities owing to it. You should therefore advise your client to settle any tax liabilities (even ones that are technically not due for payment yet) before the company is placed in liquidation in order to avoid HMRC charging statutory interest.
Distributions
Any distribution made to a shareholder whilst a company is in liquidation will be a capital distribution and be subject to capital gains tax (CGT). As the company is a trading company, business asset disposal relief will be available at 14% (increasing to 18% from April 2026).
Pro advice. It does not matter that the company will not have been de-registered yet, any distribution will be subject to CGT as long as it was made after the liquidator was appointed. Any distribution made outside of the liquidation process will be subject to income tax.
Distributions can either be made in cash or in kind, therefore the client will have the choice as to whether the liquidator sells the office building and distributes the net cash proceeds to them, or they receive the office itself as a distribution in specie.
Example. The client would like to receive the office as a distribution in specie so that they can let it out during their retirement. The £200,000 market value will be the distribution amount, with your client’s CGT liability being £28,000 (£200,000 x 14% – assuming the shares have a nil base cost).
It’s important to note that the distribution of the office in specie will represent a disposal of the property by the company and therefore corporation tax may be due if a gain arises. Any corporation tax would need to be settled out of the company’s £50,000 cash balance before it is distributed to your client.
Pro advice. No land transaction taxes, e.g. SDLT, will be triggered on the property transfer as the distribution will be for nil consideration.
Anti-abuse
Another key introduction in 2016 was the targeted anti-avoidance rule (TAAR) which, if triggered, can reassess any liquidation distribution as income rather than capital. There are four conditions that need to be met before the rules apply, and these are set out at CTM36305+ , but broadly they will apply where a shareholder of a liquidated close company carries on (or is involved with or starts up) a similar trade or activity of the liquidated company within two years of the capital distribution received, and the main purpose of the liquidation was to avoid income tax.
Pro advice. As the client is winding up the company for retirement and lack of succession reasons, they are not doing it to avoid tax and therefore the rules will not apply.
The TAAR should not apply to them as the tax avoidance motive for shutting the company down is not there. However, that doesn’t mean HMRC won’t enquire, and potentially try to apply the rules. Given this, as well as the cost of a formal liquidation, would a strike off be better for the client?
Strike off
In contrast to a formal liquidation, the procedure to strike off a company is much more straight forward and cheaper. Once a company hasn’t traded or sold any stock for the last three months, the directors can hold a meeting to approve the strike off and then complete Form DS01 and submit it to Companies House along with the fee of £44.
Pro advice. Interested parties such as creditors, employees, shareholders and any directors who didn’t sign the application form, must be sent a copy of the DS01 form within seven days of submission to Companies House.
Pro advice. If creditors are not properly advised of the intention to strike off, they can apply to have the company restored to the register so as to pursue recovery of their debt.
As with a liquidation, the application to strike off will be advertised in the London Gazette to allow potential creditors to come forward. If there are no objections, the company will be struck off the register within two months, and will be dissolved.
Distributions
Ordinarily, distributions from a company made otherwise than under a formal winding up would be subject to income tax. However, distributions made in anticipation of a company dissolution can qualify as a capital distribution providing two conditions are met per CTM36220 . The first is that, at the time of the distribution, the company has (or intends) to secure payment from its debtors and make payment to its creditors and, secondly, the amount of the total distribution(s) does not exceed £25,000. If it does the whole amount will be subject to income tax, not just the excess.
Pro advice. Distributions need to be made to shareholders before the company is actually dissolved, otherwise any assets still in the company will belong to the Crown.
As with a formal liquidation, distributions made on strike off can include both cash and in kind distributions, therefore your client will not be able to take advantage of the informal striking off procedure due to the value of the property exceeding £25,000. A liquidation will therefore be the most tax-efficient route for your client.
Summary
Striking off is cheaper and easier than a liquidation, but distributions only receive capital treatment up to £25,000. A formal winding up is more expensive and involves the appointment of an insolvency practitioner, but any amount of distribution will be subject to capital gains tax. Restoration of the company is also rare under a formal liquidation.
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