When the decision has been made to wind up a dormant company and to distribute any remaining assets to the shareholders there are essentially two ways in which this can be done:
- Informal strike off
- Formal MVL
Tax implications
Informal Strike Off
Under current legislation, where total distributions made in anticipation of an informal striking off amounts to £25,000 or more, the entire distribution is treated as income rather than a capital gain. As a result, it is taxed at dividend income rates, which are due to increase from 6th April 2026. Accordingly, such distributions will be taxable at 10.75% for basic rate taxpayers and 37.75% for higher rate taxpayers, while the additional rate remains unchanged at 39.35%.
Under current legislation, where total distributions in anticipation of informal striking off total £25,000 or less, any such distribution would be treated as capital rather than income. These are taxed under the capital gains rules. Therefore, a distribution of this kind is taxable 24%, subject to the availability of any base cost, annual exemption and capital losses.
In certain circumstances, shareholders may be able to receive funds at 18% (14% prior to 5th April 2026), if the capital gain qualifies for Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief).
If distributions of more than £25,000 are made, then ALL the distribution is treated as income. The decision to follow an informal striking off route will now require a lot more consideration depending on the amounts left to distribute.
Members Voluntary Liquidation (“MVL”)
A formal winding up route appears to be the only available solution to shareholders wishing to treat distributions of more than £25,000 as a capital gain. To commence an MVL, it will be necessary for the Directors to produce a Statement of Solvency which will include the estimated realisable value of the company’s assets; the liabilities; the estimated cost of the Liquidation process; and the expected return to shareholders.
A Licensed Insolvency Practitioner is required to carry out an MVL and will assist the Directors in producing the Declaration of Solvency; calling the meetings of shareholders; collecting the assets; and distributing them amongst the creditors and shareholders. The main benefit of an MVL can be the tax saving. A basic example of potential tax savings is shown below:
• Company A is left with £100,000 of cash after selling its trade and assets. Corporation tax on the sale of the assets and all other liabilities has been settled. The cost of the share on incorporation 10 years ago was £1,000. The shareholder has never claimed Business Asset Disposal Relief before.
• Under the information striking off route, the total distribution of £100,000 is above the £25,000 limit and therefore income tax will apply.
• This distribution of (100,000 – 1,000) will be taxed as follows (assuming no other income was received in the year):
500 @ 0%
37,200 @ 10.75% = £3,999
61,300 @ 35.75% = £21,915
Total tax = £25,914
• If a Licenced Insolvency Practitioner is appointed as a Liquidator to formally wind up the company under an MVL, then capital treatment would apply. The capital gains tax with Business Asset Disposal Relief would be:
£(100,000 – 1,000), less annual exemption of £3,000 (for 26/27 tax year), which leaves £86,700 at 18% = £17,280.
It is easy to see in this basic example that the shareholder saves over £8,000 of tax. The more distribution, the greater the saving becomes.
Even if the disposal does not qualify for BADR (or the individual has utilised their BADR lifetime allowance) the tax saving is still significant. The CGT would be payable at 24% in this case (£20,808 of CGT using the figures above) with a tax saving of over £5,000.
Apart from the obvious tax savings, an MVL also has the following benefits:
• A Liquidator will advertise for all creditors to claim within the Liquidation. If creditors do not subsequently claim within the prescribed time limit, they may not (with very few rare exceptions) later apply to have the company restored to the Register in order to pursue it.
• The process is usually low cost, depending on what assets and liabilities are left within the company at the date of Liquidation.
• The process is quick and carried out by a Licenced Insolvency Practitioner.
• A distribution can be made to shareholders shortly after the company is placed into Liquidation, in certain circumstances.
If you are considering winding up a solvent company which has distributable assets over £25,000, advice should be sought from both a tax specialist and a Licensed Insolvency Practitioner.
Anti Avoidance Measures
There are several anti avoidance rules to consider when winding up a company.
Distributions made shortly before striking off
Rules are in place to prevent companies from paying a dividend immediately before dissolution simply to reduce distributable profits to below £25,000 and thereby qualify for capital treatment. Where HMRC considers that a pre-strike off dividend was paid with this intention, they have the discretion to treat the earlier dividend and the final distribution as a single distribution on winding up. This excludes normal commercial dividends paid as part of the company’s usual profit extraction pattern.
Phoenixing Rules
Another key anti avoidance measure applies where a director winds up a company and receives capital treatment on the final distribution but then continues with the same or a substantially similar business through a new company with the same or broadly the same ownership within two years. In these circumstances, the distribution on winding up may be reclassified as income rather than capital. This is commonly referred to as ‘phoenix-ing’.
The phoenixing rules can be complex. If you would like further guidance or wish to discuss how these rules may apply to your circumstances, please feel free to contact a member of the corporate tax team.
*Note: the tax rates and allowances outlined above are correct based on legislation and published changes issued by HMRC as at August 2026.
