Thinking of Winding Up Your Limited Company? The Capital Gains Tax Changes That Could Cost You Thousands

For most contractors, the decision to wind up a limited company feels like a distant future concern. But in 2026, it’s a question that deserves attention regardless of where you are in your contracting career — because the tax landscape around company closure has changed materially, and those changes can have a five-figure impact on what you receive when you finally do close the door.

Whether you’re approaching retirement, pivoting to a salaried role, or simply reassessing your contracting structure, understanding the capital gains tax implications of closing your limited company — and the reliefs available — is essential planning.

This blog explains how company closure works, what’s changed with CGT in 2026, how Business Asset Disposal Relief (BADR) fits into the picture, and what you should be doing now if closure is on your horizon.

How Company Closure Works

When a limited company is wound up, any assets remaining — including retained cash and profits — are distributed to shareholders. This distribution is typically treated as a capital gain rather than income, which has historically made it more tax-efficient than drawing retained profits as dividends.

There are two main routes for closing a limited company:

Voluntary Strike Off (Dissolution)

For smaller companies with limited retained assets (typically up to around £25,000), a voluntary strike off via Companies House is usually the simpler route. The company assets are distributed before dissolution. This is straightforward but only appropriate for companies with modest retained cash and no outstanding liabilities or tax issues.

Members’ Voluntary Liquidation (MVL)

For companies with larger retained cash or significant assets, a formal MVL is typically the appropriate route. A licensed insolvency practitioner is appointed to formally wind up the company, settle any liabilities, and distribute the remaining assets to shareholders as capital distributions.

The capital distributions from an MVL are treated as capital gains — and are therefore subject to capital gains tax rather than income tax. This is usually significantly more favourable than extracting the same funds as dividends, though the 2026 CGT rates have narrowed that advantage somewhat.

💡 Crew Insight The threshold for when a formal MVL is worthwhile versus a simple dissolution is typically around £25,000–£35,000 of retained assets. Below that level, the cost of an insolvency practitioner (typically £1,500–£3,000) may not be justified by the tax savings. Above that threshold, the tax advantage of capital treatment versus dividend extraction can be substantial — particularly if Business Asset Disposal Relief is available.

 

What Has Changed with Capital Gains Tax in 2026?

The CGT landscape for company owners has shifted significantly in the past 18 months. The key changes affecting contractors closing their companies are:

Higher CGT rates

Capital gains tax rates for most asset disposals increased from the 2024 Autumn Statement onwards. For basic rate taxpayers, the rate on most gains increased. For higher rate taxpayers — which many contractors will be, particularly in the year they close a profitable company — the main rates on chargeable gains are now meaningfully higher than they were two years ago.

Business Asset Disposal Relief changes

Business Asset Disposal Relief (BADR) — formerly Entrepreneurs’ Relief — provides a reduced CGT rate on qualifying disposals. The BADR rate was 10% until April 2025, rising to 14% from April 2025 and scheduled to rise to 18% from April 2026.

This stepped increase is significant. A contractor with £200,000 of retained profit in their company would have paid £20,000 under the 10% rate, £28,000 under 14%, and will pay £36,000 at 18%. That £16,000 difference illustrates why timing matters.

Lifetime allowance

BADR applies to a lifetime limit of £1 million of qualifying gains. For most contractors, the retained profits in their limited company will be well within this limit — but it’s worth confirming, particularly if you have or have had other business disposals.

💡 Crew Insight The timing of company closure has always mattered from a tax perspective. In 2026, it matters more than ever. The difference between closing your company in 2025/26 versus 2026/27, or between qualifying and not qualifying for BADR, can be tens of thousands of pounds. This is one area where we’d encourage contractors — particularly those with meaningful retained profits — to engage their accountant well in advance of any planned closure, rather than as an afterthought.

 

Qualifying for Business Asset Disposal Relief

BADR doesn’t apply automatically. To qualify, a number of conditions must be met:

• You must be a shareholder and an officer or employee of the company
• You must have held the shares for at least two years prior to disposal
• The company must be a ‘qualifying trading company’ (broadly, a company that’s been trading rather than primarily holding investments)
• The disposal must meet specific conditions regarding your holding size and role

 

For most actively-trading contractor limited companies, the conditions are typically met. However, companies that have become primarily investment holding vehicles — holding significant cash reserves or financial assets without active trading — may not qualify.

💡 Crew Insight The ‘trading company’ qualification for BADR is worth checking carefully if your company has significant retained cash relative to its turnover. HMRC applies a ‘substantial non-trading activities’ test — broadly, if more than 20% of the company’s activities are non-trading (such as holding investments), the BADR claim may be affected. This is a nuance worth exploring with your accountant before assuming BADR is available.

 

What About the Retained Profits?

The most common scenario for contractors closing their company involves retained cash profits. The key question is whether those profits can be distributed as capital (via MVL) at the BADR rate, or whether they’ll be treated as income (dividend).

HMRC has anti-avoidance rules (particularly ‘Transactions in Securities’ rules) that can reclassify what looks like a capital distribution as income in certain circumstances — for example, where the company owner is continuing to carry on a broadly similar trade shortly after closure. The ‘phoenix’ scenario — closing a limited company and immediately opening a new one to do the same work — is specifically targeted by HMRC and can result in the distribution being taxed as income rather than a capital gain.

This is not a hypothetical concern. HMRC scrutinises MVLs more closely than it did previously, and the anti-avoidance rules are applied actively.

Common Mistakes Contractors Make with Company Closure

Mistake 1: Leaving it too late to plan

Company closure tax planning done in advance — ideally 12–24 months before the intended date — provides far more flexibility than planning done after the decision has effectively been made. Timing of distributions, qualification for BADR, and other planning opportunities all require lead time.

Mistake 2: Not understanding the phoenix risk

Contractors who plan to close one company and immediately begin contracting through another — or move back into employment in the same field — should take specific advice on the Transactions in Securities rules before proceeding.

Mistake 3: Assuming BADR applies automatically

BADR must be claimed and the conditions must be met. It’s not assumed. A company that’s been dormant, or has significant non-trading assets, may not qualify. Checking in advance avoids an unwelcome surprise at the point of closure.

Mistake 4: Using dissolution when MVL is more appropriate

Above the ~£25,000 retained assets threshold, using a simple dissolution rather than MVL may not be available under the rules and could create personal tax exposure. The right route depends on the specific facts.

The Accounting Crew’s Perspective

We help contractors navigate company closure as a planned, tax-considered exercise — not a rushed reaction to a change in circumstances. The difference in tax outcome between a well-planned closure and an unplanned one can be significant, and the window for planning is often longer than people think.

In 2026, with BADR rates having increased and CGT broadly higher, we’d encourage any contractor who has meaningful retained profits and an eye on eventual closure to have a conversation sooner rather than later. The options available to you are wider the further in advance you plan.

Conclusion

Closing a limited company is, for most contractors, a one-time event that has significant financial consequences. In 2026, those consequences are shaped by a CGT environment that is more complex and less generous than it was even two years ago.

Understanding the routes available, the reliefs that may apply, and the pitfalls to avoid is genuinely important — and the planning is best done well before the closure date. If you’re anywhere near the horizon of winding up your company, now is the right time to have this conversation.

Frequently Asked Questions

What is the CGT rate on a company closure in 2026?

It depends on whether Business Asset Disposal Relief applies. If BADR is available, the rate is 18% from April 2026. Without BADR, higher rate taxpayers face the main CGT rate, which has increased since the 2024 Autumn Statement. Your specific position should be calculated based on your total gains in the year.

What is the difference between a voluntary strike off and an MVL?

A voluntary strike off (dissolution via Companies House) is appropriate for companies with minimal retained assets, typically up to around £25,000. An MVL involves a licensed insolvency practitioner and is appropriate for companies with significant retained cash. The capital distribution from an MVL qualifies for CGT treatment; dissolution above the threshold may not.

Will BADR apply if I continue to work as a contractor after closing my company?

If you continue contracting in the same or substantially similar field immediately after closing, HMRC may apply the Transactions in Securities anti-avoidance rules. This is a complex area that requires specific advice based on your circumstances before you make any decisions.

How far in advance should I plan a company closure?

At a minimum, 12 months. For contractors with significant retained profits, 18–24 months of advance planning provides the most flexibility for timing distributions, qualifying for BADR, and managing the overall tax position.

What does an MVL cost, and is it worth it?

A licensed insolvency practitioner typically charges £1,500–£3,000 for an MVL. For companies with retained cash significantly above £25,000–£35,000, the tax saving from capital treatment versus dividend extraction usually makes this cost worthwhile. For smaller amounts, a dissolution may be more appropriate.

If you have retained profits in your company and are thinking about the longer-term picture — whether that’s closure, retirement, or a change in direction — getting ahead of the planning is the smartest move you can make.

Ready to Take Control of Your Finances? The Accounting Crew helps contractors navigate company closure as a planned, structured process — ensuring the tax outcome is as efficient as possible. Book a free discovery call and let’s look at where your company is headed and what the options are. 👉  Book your free discovery call at theaccountingcrew.co.uk/book-a-free-call/