Closing a limited company: What next for your cash assets?

Peter Nutini

Peter Nutini

Financial Planner

You have decided to close down your limited company. You’ve built up a good sum of money in your company bank account but you’re unsure of the options available to you to make the most of your cash assets. 

Closing your limited company via a Members’ Voluntary Liquidation (MVL) can be a tax efficient way to wind your company up, presenting you with a lump sum of money. Looking ahead, while this sounds an appealing way to close your company down, it’s important to think about how you could potentially invest this lump sum, should you not have an immediate need for the money. 

Director pension contribution

One possible option you may wish to consider is making a director’s pension contribution before the company closes.

The main advantage of the pension contribution, provided it passes the wholly and exclusively test, is that it can be offset against profits for example a £40k pension contribution would save 20% corporation tax i.e. £8k.

Depending on age and objectives, once the monies are in a pension they can be invested in a wide range of asset classes including cash, gilt, bonds, shares and commercial property. Any gains made within a pension are free from capital gains tax, and any income from assets within a pension are free from income tax, making it an attractive vehicle to use to build up funds for retirement.

Pension freedom considerations

Recent changes to pension legislation mean that once clients are age 55 they are able to draw 25% of their pension fund tax free, and with the introduction of these new Pension Freedoms they could take the remaining monies out as a lump sum. Although, do make sure to take tax advice since funds over 25% will be classed as income and taxed accordingly. You should also note that this will restrict the amount you can contribute to a pension in future.

Directors aged under 55

However if you are younger than 55 and don’t feel comfortable with ‘locking away’ money in a pension scheme until they are 55 (and note by 2028 the minimum age at which they can access pension benefits is changing to be ten years before the state pension age), then an MVL with the immediacy of the cash lump sum may be more appealing.

Importance of seeking advice

To understand the options available we strongly recommend that you seek independent financial advice. At Johnston Carmichael Wealth, we advise individuals and businesses of all sizes and our independent status allows us to offer a broad range of products and services from the across the market.

Get in touch with me or a another member of the Wealth team to find out more about how we can help.

Disclaimer: The purpose of this article is to provide technical and generic advice and should not be interpreted as a personal recommendation or advice. All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change, and are dependent on your individual circumstances.