If running your business as a limited company results in higher tax bills, you may want to become a sole trader again. But there’s no automatic tax relief when closing a company down. You must carefully move any money or assets from the company back to your personal ownership. Let’s explore simple ways entrepreneurs could save tax when switching structures.

Cashing Out The Company

Any profits not already paid out belong to the company, even if it’s all your money. Taking these assets back for yourself counts as a ‘distribution’. For example, the company may have cash savings, equipment, properties or investments. Distributions are taxed as income, so could leave you with a major tax demand.

However, closing the company properly can reduce this hit under more favourable capital gains tax rules in some situations. Just beware that since 2016, the taxman has made it harder to stop people from avoiding income tax.

The Taxman Tackles Tricky Tactics

One tactic used is quickly setting up a new company and transferring assets after winding up the old one. Known as ‘phoenixing’, this move can secure lower capital gains tax on profits taken from the old business.

But wise to these resurrecting-from-the-ash ploys, the taxman now blocks certain wind-up payouts qualifying for lower capital gains tax if shareholders restart very similar companies afterwards. Unless you have genuine reasons to close existing companies, the taxman can now impose income tax on profits extracted this way.

He is also clamping down on shareholders sneakily taking income as capital gains to pay less tax. For instance, you can sell shares from one company you own to another company you control. These artificial attempts to dodge tax get heavily penalised now.

How To Save Tax Properly

Despite recent crackdowns, there are still legitimate ways entrepreneurs can save tax when switching from a company structure:

Get Advice Early

Consult a tax professional before dissolving your company to avoid stumbling into trouble. They can suggest the most efficient exit strategies and ensure the book does all reporting and asset transfers.

Consider Ongoing Profits

Review your last few years’ profits and realistic future earnings projections when deciding whether to close your company. Since 2016 especially, tax changes have made operating small companies with less than £50,000 profits through a sole trade more efficient. But between £50,000-£150,000, careful dividend planning could still justify staying incorporated.

Don’t Rush Dissolutions

Where accumulated profits inside the company are only sometimes needed for personal use, consider extracting them gradually by using up dividend tax allowances across multiple years. This reduces tax liability and delays formal dissolution until it suits you.

Plan Asset Transfers

Also, think carefully about your intentions for any properties, investments or equipment owned by the company well in advance. Gifting surplus assets to the family before closing down can achieve capital gains advantages in some situations. Seek tax guidance on the most efficient strategies for redistributing valuable residual company assets.

Review Wider Tax Picture

Your personal tax landscape also impacts whether operating through a company still makes sense. For example, if sizable investment income already places you in higher tax bands, sole trading could mean you pay basic rate tax on that first £50,000 of business profit instead.

Before dissolving your company, it’s imperative to weigh all the key factors carefully. You can successfully preserve your pitching structures with meticulous planning and expert advice. It is, however, crucial to approach this process with unwavering confidence and complete knowledge to avoid future problems.