Closing a company - last ditch tax planning

Voluntary liquidation

The shareholders of a solvent company can at any time choose to take their share of its cash and other assets, after settling all debts, by winding it up. This is called a members’ voluntary liquidation. If the value received by a shareholder exceeds the amount they paid for their shares, the difference is a capital gain on which capital gains tax (CGT) is payable, after deducting any exemptions and reliefs. With planning the CGT can be reduced.

Tax planning

To reduce the gain and thus the CGT payable the shareholders should consider how they might extract income from the company tax and NI efficiently before winding it up. The aim should be to extract money on which tax and NI is payable at a rate lower than on the capital gain they’ll make.

One option for shareholders who are also directors or employees is to pay themselves termination payments. These can be completely tax and NI free for payments up to £30,000.

The £30,000 exemption doesn’t apply to payments relating to notice periods. All such payments are taxable and liable to NI as earnings.

Making a director redundant

When director shareholders wind up a company it’s required to make statutory redundancy payments to employees whose jobs will be terminated (if they meet the conditions). The bad news is that directors who are also controlling shareholders won’t be entitled to redundancy pay unless they were forced into winding up the company. For example, to prevent it from becoming insolvent and so prevented from trading.

A director who doesn’t have a service contract (employment contract), written, oral or implied, has no entitlement to salary etc. and so doesn’t qualify for statutory redundancy payments.

Contractual pay-offs

The good news is that the £30,000 exemption can apply not only to statutory redundancy payments, but to other amounts paid by a company which specifically relate to the termination of employment contracts or directors’ service contracts. Having a contract of employment which entitles a director to salary etc. allows a tax and NI-free payment to be made in place of all or part of the taxable payment receivable from the winding up.

It’s in the contract

Unlike statutory redundancy payments, there’s no standard formula for working out how much can be paid. As a rule of thumb any payment should be reasonable compensation for the loss of remuneration, i.e. salary plus benefits but not dividends. The latter doesn’t count as they are paid in connection with the shareholding and not the role as director or employee.

In practice HMRC is unlikely to object to a payment equivalent to six months’ remuneration, but higher payments aren’t out of the question.