Dissolution Relief: Cut CGT When Closing Your Limited Company

What Is Dissolution Relief?

When you wind up a limited company informally, HMRC allows distributions made during the striking-off process to be treated as capital receipts rather than income. This means you pay Capital Gains Tax (CGT) rather than Income Tax and National Insurance on the money you take out — often a significantly lower rate. This relief is now enshrined in statute under Section 1030A of the Corporation Tax Act 2010, introduced to replace the old extra-statutory concession.

Who Qualifies for Dissolution Relief?

To use Dissolution Relief, your company must meet all of the following conditions:

• The total assets being distributed do not exceed £25,000
• The company is being struck off voluntarily under the Companies Act 2006
• The company is genuinely ceasing to trade — it cannot be part of a tax avoidance arrangement
• You apply to Companies House to strike off the company

If your final distributions exceed £25,000, the entire amount is treated as income, not just the excess. This is a hard cliff edge, so careful planning around this threshold is essential.

How Does the Tax Saving Work?

Without Dissolution Relief, funds extracted from a company are typically treated as dividends, taxed at 8.75%, 33.75%, or 39.35% depending on your income tax band. With Dissolution Relief, those same funds are subject to CGT. In 2026/27, the CGT rates on non-residential assets are 18% for basic rate taxpayers and 24% for higher rate taxpayers. You can also offset your Annual Exempt Amount (£3,000 for 2026/27) against the gain.

Better still, if you qualify for Business Asset Disposal Relief (BADR), formerly Entrepreneurs' Relief, you may pay CGT at just 14% on qualifying gains up to a lifetime limit of £1 million. BADR applies when you have owned at least 5% of the shares and been a director or employee for at least two years before the disposal.

Step-by-Step: How to Close Your Company Using Dissolution Relief

• Cease trading and settle all liabilities — pay any outstanding corporation tax, VAT, PAYE, and supplier invoices before distributing assets.
• Prepare final accounts and pay corporation tax — your company must be up to date with HMRC filings.
• Distribute assets up to £25,000 — this can include cash, but also other assets valued at market rate. Keep total distributions below the threshold.
• Apply to Companies House — submit form DS01 to strike off the company. HMRC and creditors are notified automatically.
• Report the gain on your Self Assessment tax return — declare the capital gain and claim BADR if you qualify using the relevant supplementary pages.

Common Pitfalls to Avoid

One of the most frequent mistakes is distributing more than £25,000 without realising the entire amount flips to income tax treatment. If your retained profits are higher, consider a formal Members' Voluntary Liquidation (MVL) instead — an insolvency practitioner-led process that allows larger distributions to be treated as capital without the £25,000 cap, while still potentially qualifying for BADR.

HMRC also scrutinises dissolutions closely for phoenix company arrangements — where a director closes one company and immediately reopens a similar one to extract profits at lower tax rates. If HMRC suspects avoidance, they can invoke the Transactions in Securities rules and reclassify your receipts as income.

Is an MVL Better for Larger Companies?

If your company holds more than £25,000 in net assets, a formal MVL is almost certainly the right route. Yes, there are liquidator fees (typically £1,500–£3,500), but the tax savings from capital treatment on larger sums will usually far outweigh the cost. An MVL also provides a clean legal closure with greater creditor protection.

Next Steps

If you're planning to close your limited company, speak to a qualified accountant or tax adviser before distributing a single penny. The difference between getting this right and getting it wrong can easily run into thousands of pounds. EasyTax can connect you with a specialist who handles company dissolutions regularly.