If running your business through a limited company inflates your tax bill, reverting to a sole trade or partnership structure can pare back your dues. But disincorporating is more complex than it sounds. While no statutory tax relief exists for shutting up shops, you must still exit the company tax-efficiently. Let me spill the beans on legally cutting your tax bill when switching to unincorporated status.

Cashing Out the Company

When assets have value within your firm, transferring them to personal ownership during disincorporation constitutes a distribution subject to income tax. This applies to amounts exceeding your shares' capital value (effectively your investment to acquire shares).

It is possible to slip distributions under the more favourable capital gains tax (CGT) banner by formally closing the company. However, anti-avoidance regulations throw stumbling blocks along this route, especially for transactions after April 2016.

New Ball Games for Phoenix Strategies

One cunning tax reduction tactic is the so-called "phoenix" approach. Essentially, you liquidate your original company yet continue the underlying business by setting up a new limited company afresh. By extracting retained profits as capital sums on winding up the liquidated firm, you enjoyed lower CGT rates than higher dividend income tax.

Wary of these resurrecting-from-the-ashes strategies, HMRC now blocks certain distributions from ducking top tax rates when shareholders are involved with successor firms. Where asset sale proceeds exceed £25,000, income tax now often applies if you participate in the same or similar trade within two years after liquidating. So hopes of wiping tax slates clean through phoenix manoeuvres get quashed in many situations.

Beware Too Clever By Half Planning

More broadly, HMRC clampdowns since April 2016 tackle tricks reclassifying income sums as capital to garner tax savings. One major target is contrived routes that let shareholders extract money taxed under CGT instead of top dividend rates. For instance, Mr X sells Company A shares to Company B, which he owns, taking the proceeds as lightly taxed capital. HMRC slams such blatant tax dodges as transactions in securities, imposing income tax on the sums extracted.

So practices like Phoenix liquidations or convoluted capital extraction mechanisms that chase tax reductions prompt HMRC to pounce. With the taxman's recent probes and offshore tax evasion drives having raised an extra £200 billion, further draconian regulations likely await any incorporated business reversing course.

Smart Strategies Still Exist

Despite tightened anti-avoidance measures, legitimate ways to cut tax bills remain when switching corporate structures. Bringing in a tax advisor to navigate regulations lets you avoid stumbling into the taxman's dragnet. They can structure changes most efficiently and correctly report extractions to minimise income tax risk.

So, by planning disincorporation prudently and dodging contrived tax tricks, there are still routes to reduce liabilities when exiting a company. Just approach the situation forearmed with insight into the latest anti-tax scheming rules so your tax affairs don't return to haunt you!