The Capital Gains Tax Implications of Closing a Limited Company

Closing a limited company is rarely just a box‑ticking exercise. Whether you’re wrapping things up after a successful journey or facing a difficult wind‑down, there can be real tax consequences for founders and investors – particularly when money or assets are distributed.

In this guide, we break down the capital gains implications of closing a UK limited company, in plain English. We cover planned closures, investor scenarios, and what happens when a company unfortunately runs out of money.

What Actually Happens Tax‑Wise When a Company Closes?

When a limited company is closed, any value left in the business (cash or assets) is normally passed back to shareholders. From HMRC’s perspective, that value is treated as a distribution.

That distribution will be taxed either as:

• Capital (subject to Capital Gains Tax), or
• Income (subject to dividend tax rates)

Which route applies depends on how the company is closed, whether it’s solvent or insolvent, and how much money is being distributed.

Closing a Solvent Company – How CGT Usually Applies

a) Members’ Voluntary Liquidation (MVL)

If the company can pay all its debts and has more than £25,000 to distribute, an MVL is often the most tax‑efficient way to close it.

In an MVL:

• Distributions are normally treated as capital
• Shareholders pay Capital Gains Tax on any gain
• The gain is broadly:

Amount received – cost of shares – allowable costs

What rate of CGT applies?

Most individual shareholders will pay CGT at:

• 10% or 20%, depending on their income level

If the shareholder qualifies for Business Asset Disposal Relief (BADR):

• The CGT rate can be reduced to 10%
• This is subject to the £1 million lifetime limit

To qualify for BADR, founders typically need to:

• Hold at least 5% of shares and voting rights
• Be a director or employee
• Have met the conditions for at least 24 months

This is especially relevant for founders and management shareholders, but often not for passive investors.

Informal Strike‑Off (Companies House Dissolution)

If the company is solvent and has £25,000 or less to distribute, it may be possible to apply for a strike‑off instead of a formal liquidation.

In these cases:

• Distributions up to £25,000 are usually treated as capital
• Anything above this is taxed as dividend income

This route can work well for smaller companies, but care is needed – particularly where there are multiple shareholders or investors – as HMRC may challenge the treatment if the closure looks like tax planning rather than a genuine wind‑down.

What About Capital Gains for Investors?

For companies with external investors, the tax position is looked at shareholder by shareholder.

Each investor’s CGT position depends on:

• Their shareholding percentage
• The amount they receive on closure
• What they originally paid for their shares

Many investors:

• Will not qualify for BADR
• May be subject to different rules (for example, corporate shareholders or funds)

Good record‑keeping is key here – especially share issue documents, subscription agreements, and historic valuations – to ensure gains (or losses) are calculated correctly.

When the Company Runs Out of Money (Insolvent Liquidation)

Not all closures are planned. Where a company can’t pay its debts as they fall due, it is classed as insolvent and will usually enter a Creditors’ Voluntary Liquidation (CVL) or compulsory liquidation.

The CGT position in an insolvent liquidation

• Shareholders often receive little or nothing
• Where shares become effectively worthless, a capital loss may arise

This loss can:

• Be set against other capital gains in the same tax year, or
• Be carried forward to offset future capital gains

In some cases, shareholders can make a negligible value claim, allowing them to lock in the loss before the liquidation formally ends. This can be particularly helpful for founders or investors with gains elsewhere.

Anti‑Avoidance Rules to Keep in Mind

HMRC is keen to prevent companies being closed purely to extract profits at lower tax rates.

The Targeted Anti‑Avoidance Rule (TAAR) may apply where:

• A company is wound up
• Capital distributions are made to shareholders
• The shareholder starts or continues a similar trade within two years

If TAAR applies, what would otherwise be capital gains can be taxed as dividend income instead.

This is a common issue for founders planning their next venture, so it’s something worth checking early.

Key Planning Points Before You Close

Before closing a limited company, it’s worth stepping back and considering:

• The most tax‑efficient way to close the company
• Whether founders qualify for BADR
• The tax position of each investor
• Whether capital losses can be claimed
• Any potential anti‑avoidance risks

A bit of planning up front can often make a meaningful difference to the final tax outcome.

How On The Go Accountants Can Help

We regularly support founders, shareholders, and investors with:

• Solvent and insolvent company closures
• Capital gains and capital loss claims
• BADR eligibility reviews
• Investor‑backed wind‑downs and exits

If you’re thinking about closing your company – whether it’s a positive exit or a tougher decision – we can help you understand the tax implications and choose the right path forward.

Get in touch with our team to talk through your options.