What is the most cost-effective way of closing down a family business?

09 September 2024

When closing a family business, whether due to financial decline or the lack of a successor to take it over, choosing the most cost-effective route is vital in extracting the maximum profits.

The company’s financial position is the initial guide as to the best method, which means establishing whether it is solvent or insolvent. Solvency means that the business can pay its bills as they become due and that the value of its assets is greater than its liabilities.

This guest post was reviewed by Jack Silk, Senior Wealth Planner at Killik & Co., with the original author credited at the end of this article.

Jack Silk

Senior Wealth Planner

Closing a solvent family business

The most cost-effective way of closing a solvent family business depends on the level of retained profits available for distribution and whether it is more beneficial for them to be taxed as capital or dividends. There are two closure options available:

Company dissolution – an informal method

Also known as company strike-off, dissolution may be an option to close a family business if:

It has not changed its name, traded, or sold any stock during the previous three months
There are no formal agreements in place with creditors
The company is not subject to a winding-up petition or liquidation proceedings
The business is solvent – attempting to strike off a company with debts can lead to serious sanctions for directors, including disqualification and personal liability

As this is an informal procedure, it costs only £10 and can be carried out by the company directors.

Is company dissolution cost-effective for a family business?

How the distributions are taxed – whether as capital or income – is key to deciding whether company dissolution is the most cost-effective option. If retained profits are below £25,000, they will be taxed as capital gains but the company must be dissolved within two years to benefit from this.

Shareholders may also be eligible to claim Business Asset Disposal Relief (BADR), which reduces their tax liability on the gain to an effective rate of 10 per cent subject to their lifetime limit.

Members’ Voluntary Liquidation (MVL) – a formal route to close a family business

MVL is an official procedure conducted by a licensed Insolvency Practitioner (IP) that allows for the capital treatment of retained profits over £25,000. Although it attracts professional fees, this process can offer a more cost-effective way to close down a family business than the company dissolution route due to the tax treatment.

Under MVL, directors must sign a declaration of solvency, pass a resolution to enter voluntary liquidation and appoint a licensed IP. In this case, the IP takes over control of the company, selling or distributing assets as required, and removing the company name from the official register.

What happens if the business has debts? Closing an insolvent family firm

An insolvent business must be closed down via a process called Creditors’ Voluntary Liquidation (CVL), as the company dissolution and MVL routes are not available if a business has unmanageable debts.

While the professional fees associated with CVL may seem prohibitive as there is no money left in the business, they can be paid from directors’ personal funds if necessary. Directors employed by the company may also be eligible to claim redundancy pay, which could be used to pay the liquidation fees.

Which closure method is the most cost-effective for a family business?

Deciding on the most cost-effective way to close a family business involves establishing the company’s financial status and looking at the level of retained profits to determine whether they will be subject to Capital Gains Tax or Income tax, if extracted by way of dividend payment.

Given the potential complexity of closing down a family business, obtaining specialist advice can help prevent taking the wrong route and inadvertently depriving family members and shareholders of profits.

Tax treatment depends on individual circumstances and may be subject to change.

About the author: Chris Bristow is a business debt expert at Real Business Rescue, company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.