What is the best way to close a company and extract the profits?
Liquidation is not just a process used by insolvent companies. Liquidation can also be used to bring an end to a solvent company which is no longer required, whether this is due to retirement, relocation, or a career change.
In many cases, opting to place a solvent company into liquidation is a much more cost-effective and tax-efficient way to bring about the end of a profitable company than the alternative opting of striking the business off the register at Companies House even though the upfront costs involved for each process may suggest that strike off is the cheapest option.
This is because solvent liquidation – by way of a formal process called Members’ Voluntary Liquidation (MVL) – allows shareholders to extract the money tied up in their business and have the proceeds classed as capital gains rather than income.
This distinction between income and capital gains becomes extremely important when it comes to how these distributions to shareholders are taxed.
How are distributions taxed when a solvent company is liquidated in Scotland?
How are distributions taxed when a solvent company is liquidated in Scotland?
When a company is closed down using a Members’ Voluntary Liquidation process, all the distributions made to shareholders are treated as capital gains and are therefore subject to Capital Gains Tax (CGT) rather than income tax.
If directors choose not to place their company into liquidation, however, and instead opt to strike the company off the Companies House register, any distribution over £25,000 will be treated as income and taxed accordingly.
While strike off may look to be the cheaper option, depending on the level of assets involved, it could end up costing you much more when tax has been applied to the distributions.
Understanding Business Asset Disposal Relief (BADR) in Scotland
Another benefit to using a formal liquidation process to close a solvent company, is the ability to take advantage of Business Asset Disposal Relief – a government tax relief scheme.
With Business Asset Disposal Relief, the rate of Capital Gains Tax levied on distributions is lowered. From April 2025, using Business Asset Disposal Relief reduces the effective rate of CGT down to just 14%. This will increase to 18% in April 2026.
When this is compared to the rate of income tax, it is easy to see how significant tax savings can be made when using a Members’ Voluntary Liquidation process to close a solvent business.
How Scotland Liquidators can help you close a solvent company
How Scotland Liquidators can help you close a solvent company
If you have a solvent company and are looking at your possible routes for exit, the experts at Scotland Liquidators are here to help.
Our team of licensed insolvency practitioners can advise whether a Members’ Voluntary Liquidation is the best option for you and your fellow shareholders. If liquidation is determined to be the most appropriate option, we can handle the whole process on your behalf, from dealing with HMRC, liaising with any outstanding creditors, through to distributing the proceeds of your limited company as quickly as possible. Call our team today.
