Closing Your Company 2026/27: Strike-Off vs MVL Tax Explained

Why the £25,000 line matters so much

When you close a limited company, the cash and reserves left inside it have to come out to the shareholders somehow. How that distribution is taxed depends entirely on the route you use to close the company, and one number — £25,000 — decides which route makes financial sense.

If a company is dissolved informally by filing a DS01 form at Companies House (the cheap, DIY route), HMRC allows any distribution of reserves made in the process to be treated as a capital distribution rather than an income distribution, but only if the total distributed doesn't exceed £25,000. This treatment (still widely referred to by its old name, ESC C16, even though it's now statutory under s.1030A CTA 2010) is why so many small companies with modest reserves close down this way: capital gains tax rates are usually much lower than dividend tax rates for the same shareholder.

Cross £25,000, and the informal route no longer gives you capital treatment on any of it — the entire distribution reverts to being taxed as a dividend. That's the trap. It isn't a taper where only the amount above £25,000 loses the relief; it's a full cliff edge.

Worked example 1: £20,000 retained profit, informal strike-off

A single-director consultancy company has wound down its client work and has £20,000 left in retained profits after paying its final Corporation Tax bill. The director, a higher-rate taxpayer with no other capital gains this year, decides to close the company via DS01 and distribute the £20,000 before dissolution.

Because £20,000 is under the £25,000 threshold, the whole amount qualifies for capital treatment.

If Business Asset Disposal Relief conditions are met (the company was a trading company, the director held at least 5% of shares and voting rights, and had done so for at least two years before closure):

• Gain: £20,000 (assuming negligible base cost, i.e. nominal share capital)
• BADR rate applies to qualifying gains up to the lifetime limit of £1 million
• Tax due is significantly lower than the equivalent dividend tax bill would have been

Compare with taking it as a dividend instead (no strike-off, just a final distribution while the company stays open, or the £25,000 limit is exceeded):

• £20,000 taxed as dividend income at the director's marginal dividend rates, after the £500 dividend allowance
• As a higher-rate taxpayer, most of that £20,000 would be taxed at the higher dividend rate

The gap between the two routes on £20,000 is easily several thousand pounds in the director's pocket — informal strike-off is clearly the right call here, and it also avoids MVL fees entirely since reserves are safely under £25,000.

Worked example 2: £150,000 retained profit, formal MVL required

A small agency has ceased trading with £150,000 in retained profits — client relationships have wound down, the director is retiring from the business, and it's time to close the company properly.

Attempting informal strike-off (the mistake to avoid): Because £150,000 is well over the £25,000 threshold, filing a DS01 and distributing the reserves informally would mean the entire £150,000 is taxed as a dividend, not capital. At higher/additional rate dividend tax, that could produce a tax bill in the region of £50,000-£60,000+, depending on the director's other income.

Using a formal Members' Voluntary Liquidation instead:

• Liquidator fees: roughly £2,000-£3,000 (deducted from the distributable pot, or paid separately)
• The £150,000 (less liquidator fees) is distributed as a capital distribution
• If BADR conditions are met, tax is due at the lower BADR rate on qualifying gains up to the £1 million lifetime limit
• If BADR doesn't apply (e.g. conditions not met), standard CGT rates of 18% or 24% still apply — both meaningfully lower than dividend tax rates on a sum this size

Even after paying £2,500 in liquidator fees, the MVL route can save tens of thousands of pounds in tax compared to an informal strike-off gone wrong on reserves this size. This is the core reason accountants almost universally recommend a formal MVL once reserves clear roughly £25,000-£30,000 — the liquidator fee is trivial next to the tax difference.

Strike-off vs MVL: side-by-side comparison

Getting the timing and paperwork right

Before filing a DS01, the company must have ceased trading, settled its final Corporation Tax liability, and any distribution of reserves needs to genuinely happen as part of winding the company up — HMRC can look unfavourably on distributions dressed up as capital when the company continues trading in substance. It's also worth checking whether Business Asset Disposal Relief conditions are met before assuming the lower rate applies automatically; the relief has its own separate qualifying conditions around shareholding percentage and trading status held for at least two years, distinct from the £25,000 strike-off threshold itself.

The bottom line

If your company's reserves are comfortably under £25,000, informal strike-off with capital treatment is almost always the simplest, cheapest and most tax-efficient way to close down. The moment reserves approach or exceed that figure, get advice on a formal MVL before filing anything at Companies House — the liquidator's fee is small change compared to what you'd lose by tripping the £25,000 cliff edge with a DIY dissolution.