Contracting Exit Strategies: Destination Matters
Introduction
Today I wanted to look at tax efficient ways to extract funds from your business when it’s time to closedown your limited company. There are various options available, and they largely depend on (a) how much money you have in your business bank account (b) your plans once you finish contracting (eg retirement, moving out of the UK, taking up a full time PAYE role), and (c) the UK tax rules (which these days are a bit of a moving target).
After years of juggling contracts, managing accounts, and keeping your limited company ticking over, you might find yourself ready for something new. Maybe it is a permanent role here in the UK, or perhaps a fresh start somewhere a little further from home. Whatever your next move, one question always crops up at this stage: how do you close your company in the most tax-efficient way possible?
To answer this, let’s look at two very familiar contractor journeys. Sarah is ready to put her contracting days behind her and step into a permanent job here in the UK. Tom, on the other hand, is heading back to New Zealand with his family after more than a decade abroad. Both have built up solid savings inside their companies, but their tax outcomes will be quite different.
In this blog, we will walk through Sarah and Tom’s decisions, explore how their choices affect the tax bill when winding up a company, and explain key concepts around Business Asset Disposal Relief and the unique transitional residency rule for returning Kiwis. By following their stories, you will learn how your own exit strategy can make a real difference to your finances, whether you are staying put or heading overseas.
Meet Our Contractors
To bring all of this to life, let’s meet Sarah and Tom – two contractors at the same crossroads, but with different destinations in mind.
Sarah has been a contractor for the best part of ten years, running her business through a UK limited company. She’s worked with a range of clients, saved diligently, and now she is ready for something different. Sarah has landed a permanent role with a top employer and has decided it is time to close her company for good. Sitting in her business bank account is £80,000 in retained profits – a tidy sum that she would much rather see in her own pocket than handed over to HMRC.
Tom has also clocked up a decade in the contracting game, but his next step is a bit more adventurous. He and his family have made the big decision to move back to New Zealand, swapping UK winters for a new lifestyle closer to home. Tom is a returning Kiwi, having been overseas for more than ten years. Like Sarah, he has built up significant savings in his limited company and wants to understand the smartest way to extract these funds before he settles into his new life on the other side of the world.
Both Sarah and Tom want to do things by the book, but neither wants to pay more tax than they have to. Their journeys highlight how your plans for the future – and even your choice of country – can make a surprising difference to the final amount you walk away with when closing your limited company.
With their stories as our guide, let’s dive into the practical options for contractors looking to wind up their companies and move on to new adventures.
Path 1: Sarah Stays in the UK – The Business Asset Disposal Relief Route
Sarah’s main goal is simple: she wants to take the £80,000 sitting in her company bank account and keep as much of it as possible. Taking it all out as a dividend would bump her into the higher-rate tax band, costing her far more in tax than she’d like. So what are her options?
Capital Distribution vs. Dividends: Two Very Different Tax Bills
When it comes to winding up a limited company, there are two main ways to take the money out:
1. Dividends:
If Sarah simply pays herself the £80,000 as a dividend, this gets taxed as income. Because her new permanent role’s salary will use up her basic rate band, most of this dividend would fall into the higher-rate tax bracket at 33.75%. That’s a hefty chunk straight to HMRC.
2. Capital Distributions:
Alternatively, if Sarah closes her company and distributes the funds as a capital payment (rather than income), she can pay Capital Gains Tax (CGT) instead. This is often much more tax-efficient – but there’s a key rule to be aware of.
The £25,000 Rule:
If the total amount paid out during a winding-up is more than £25,000, the whole lot is automatically taxed as income unless you use a formal Members’ Voluntary Liquidation (MVL). Since Sarah has £80,000, an MVL is essential to treat her payout as a capital gain, not income.
What is a Members’ Voluntary Liquidation (MVL)?
A Members’ Voluntary Liquidation (MVL), is a formal process for closing down a solvent company – that is, a business that can pay all its debts. An MVL is handled by a licensed insolvency practitioner, who takes care of the legal paperwork, settles any outstanding liabilities, and then distributes the remaining funds to shareholders.
For contractors, the main attraction is tax efficiency. If your company has more than £25,000 to distribute, using an MVL allows the money you take out to be treated as a capital gain rather than income. This almost always means a much lower tax bill, particularly if you qualify for Business Asset Disposal Relief.
A lot of clients new to this process get concerned about the word “liquidation.” Usually, liquidators are called in when things go bad, and it can sound a bit dramatic. In this case, though, an MVL is a solvent liquidation – which means it is a “good” liquidation. There are no negative impacts on your credit score or reputation, because the business is being closed after paying all of its bills. It is simply a formal and tax-efficient way to wind things up when the time comes.
While an MVL does involve some professional fees (typically in the range of £2,000 to £4,000), the potential tax savings can be substantial if you have significant retained profits. For many contractors, it is the preferred and most cost-effective route for closing down their limited company.
What is Business Asset Disposal Relief (BADR)?
This is where BADR (previously Entrepreneurs’ Relief) comes in. BADR allows you to pay a much lower rate of CGT when closing your company via an MVL. From 6 April 2025, the BADR rate is 14%, and it will rise to 18% from April 2026. There is also a lifetime BADR limit of £1 million in gains, which covers most contractors several times over.
The Rules of the Game: Qualifying for BADR
To qualify for BADR, you need to meet all of the following:
- Personal & Trading Company: You must own at least 5% of the shares and voting rights in a trading company.
- Employee or Office Holder: You must have been a director or employee.
- Two-Year Rule: You must meet these conditions for at least two years before you stop trading.
- Three-Year Window: You need to liquidate your company (sell the shares) within three years of stopping trading.
The Three-Year Window: When Does Your Business Actually “Cease Trading”?
One of the most important rules for Business Asset Disposal Relief (BADR) is the so-called three-year window. This means you must liquidate your company, or dispose of your shares, within three years of your business permanently stopping trading. Get this timing wrong, and you could lose out on the relief altogether.
A common worry is, “My last client paid me ages ago. Does that mean my business has already ceased?” In reality, the date you last issued an invoice is not always the date your company stopped trading for BADR purposes. The real cessation date is when you finally decide to stop trying to get new business, close the doors for good, and move towards winding up the company.
If you have been actively seeking new work, even if nothing materialised, your company is usually still considered to be trading, or at least “on standby.” This was confirmed in the case of Potter v HMRC (2019), where a company had no trading income for several years but the directors kept looking for contracts and maintained the business infrastructure. The tribunal decided the company had not ceased trading until the directors gave up their search and opted to close the business permanently.
HMRC guidance and case law both support this view. If you genuinely continue efforts to find work, keep paying for accountants, and keep your business ready to restart, your company is still a trading company. Only when you stop all attempts and make the decision to close down does the three-year clock start ticking.
If you find yourself with a gap between contracts, make sure to keep a record of your efforts to find new business. Save emails to recruiters, records of job applications, or even your own notes about business development activity. If you ever need to prove your company was still trading or preparing to trade, this evidence could be the difference between qualifying for BADR and missing out.
The “three-year window” for BADR is based on the date you genuinely cease trading, not just when your last invoice was sent. For most contractors, as long as you have continued to seek work, you will have longer than you think to close your company and claim relief. The safest approach is to document your activities, and speak to your accountant before making any big decisions about winding up. Your safest bet is to closedown within three years of your last invoice, but as mentioned above, this does not need to be a hard and fast rule.
Sarah’s Story: The Calculation
Sarah ticks all the BADR boxes and proceeds with an MVL. Here’s how the numbers look:
- Capital Gain: £80,000
- Less Annual Exempt Amount (2025/26): £3,000
- Taxable Gain: £77,000
- Tax with BADR (at 14%): £77,000 x 14% = £10,780
If Sarah had instead paid herself the full amount as a dividend and landed in the higher-rate tax band, she would pay tax at 33.75% – a bill of £27,000. That is nearly three times as much as the BADR route.
Key Takeaway
If you are a contractor with more than £25,000 in retained profits and you are staying in the UK, using an MVL and claiming BADR is usually the most tax-efficient way to close your company. It pays to get advice and plan the process carefully – Sarah’s story shows just how big the savings can be.
Path 2: Tom Moves to New Zealand – A Different Set of Rules
Tom’s next chapter is taking him back to New Zealand with his family. Like Sarah, he wants to extract his company’s retained profits as tax-efficiently as possible. But Tom’s move opens up a unique opportunity, thanks to a little-known rule in New Zealand tax law.
The New Zealand Transitional Resident Rule
For Kiwis who have been non-resident for tax purposes for at least ten years, New Zealand offers a significant advantage: the transitional resident rule. This provides a four-year window, starting from the date you become a New Zealand tax resident again, where most foreign-sourced income, including dividends paid from your UK limited company, is exempt from New Zealand tax.
This means that, unlike most other countries, New Zealanders returning home after a long stint overseas can take advantage of a genuine “tax holiday” on many overseas earnings. For Tom, this opens up a completely different route for extracting his company funds.
How This Works for Tom
Because Tom meets the requirements (having been non-resident for over ten years), once he lands back in New Zealand and becomes tax resident again, he has four years where he can receive dividends from his UK company without those funds being taxed in New Zealand.
Comparing Tom’s Two Options
So, what are Tom’s choices?
Option A: The BADR Route in the UK
Tom could follow the same path as Sarah – close his company with a Members’ Voluntary Liquidation (MVL) and claim Business Asset Disposal Relief. This would see his company’s retained profits taxed as a capital gain in the UK, at 14%. This could potentially all be completed before he leaves the UK.
Option B: The Transitional Resident Dividend Route
Alternatively, Tom could extract the funds from his UK company as dividends after becoming a New Zealand tax resident (and importantly once he has ceased being a UK tax resident and after the tax year he left the UK has ended). In this scenario, Tom would not pay any UK dividend tax, and usefully there would be no New Zealand tax on those dividends during his four-year transitional period.
Which Option Is Best for Tom?
The most tax-efficient choice for Tom comes down to timing and personal circumstances. If he takes the BADR route, Tom will pay 14% capital gains tax in the UK via an MVL, similar to Sarah’s outcome. If he waits until he is settled back in New Zealand and his UK tax residency has ended (and after the relevant UK tax year has closed), he can take the money out as dividends from his UK company. Thanks to the transitional resident rule, those dividends will not be taxed in New Zealand during his four-year window – and, crucially, with careful planning, Tom can also avoid UK dividend tax entirely once he is non-resident for UK tax purposes.
Tom’s Example
Let’s assume Tom has £80,000 to extract from his company. Here’s how the tax would look under each route:
- Option A: BADR via MVL in the UK
- Tom closes his company before leaving the UK. He pays 14% capital gains tax (after the annual exemption), so on £77,000 the tax would be £10,780.
- Option B: Dividends under the NZ Transitional Resident Rule
- Tom waits until he is fully non-resident for UK tax and has become a New Zealand tax resident. He then pays himself a dividend. In this scenario, Tom pays zero UK tax and zero New Zealand tax on the dividend during the four-year transitional period.
That is about as tax-efficient as it gets.
Why Timing Matters
It is absolutely vital that Tom gets the timing right. To avoid UK dividend tax, he must only pay out the dividends after he is non-resident in the UK and the tax year of departure has finished. If he takes dividends while still UK resident, or during his final UK tax year, UK dividend tax may apply.
Key Takeaway
If you are moving overseas, you may have more than one tax-efficient option for extracting your company funds. For many, the transitional resident rule in NZ offers a unique tax-saving opportunity that simply does not exist elsewhere. The key is to get advice early and plan the steps carefully – mistiming things by even a few weeks could mean missing out on a significant tax saving.
Tom’s story is a reminder that international tax planning is all about knowing the rules on both sides of the world, and taking advantage of the unique windows available to you.
What About… (Common Questions & Pitfalls)
When it comes to closing your company, it is natural to have a few lingering questions – or to worry about getting caught out by the small print. Here are some of the most common queries we hear from contractors in your shoes.
When Does My Trade Actually “Cease”? Understanding the 3-Year Rule
A frequent worry is, “My last contract ended a year ago, but I have been looking for work ever since. Have I missed the three-year window for BADR?”
The good news is that the date of your last invoice is not necessarily the date your trade ceased. What really matters is when you made the final decision to stop trying to trade and to wind the company up. If you have been actively seeking new business – even if you have not landed a contract – your company is still “on standby” and can be considered a trading company.
This principle was confirmed in the case of Potter v HMRC, where a business was allowed to treat a long period of inactivity as a “pause” rather than a cessation, because the directors were actively looking for new work. The three-year clock for BADR only starts ticking once you permanently stop those efforts and decide to close up shop.
Actionable Tip: Keep evidence of your job search or business development activities during quiet periods. Save emails with recruiters, records of applications, or notes of meetings. These can be vital if you ever need to prove your intent to continue trading, protecting your eligibility for BADR.
The “Phoenixing” Rule (TAAR): Don’t Get Caught Out
There are specific anti-avoidance rules, known as the Targeted Anti-Avoidance Rule (TAAR), designed to stop people from shutting down a company and then starting up a similar business straight away to gain a tax advantage. Under TAAR, a distribution from your company will be taxed as income (not capital) if all of the following apply:
- The company is a “close company” (most contractor limited companies are)
- You hold at least a 5% share
- Within two years, you start up (or continue) the same or a similar trade
- A main purpose was to obtain a tax advantage
So if you plan to carry on contracting in a similar way after closing your current company, seek advice before proceeding, or you could find the entire distribution taxed at income rates rather than the lower capital gains rates.
The £25,000 Capital Distribution Limit
If you do not use an MVL and your company pays out more than £25,000 when closing, the entire distribution will be taxed as a dividend (income), not as a capital gain. This is why the MVL process becomes essential for anyone with significant retained profits.
MVL Costs: When Does It Make Sense?
With the new 14% BADR rate, the break-even point where an MVL starts to save you money is now around £25,000 of retained profits. Below this, the cost of the MVL process might outweigh the tax savings. Above it, the tax benefits usually justify the professional fees involved.
A Moving Target: Tax Rules Can, and Do, Change
One word of caution: the tax landscape is never static. The rules and reliefs discussed in this article, including BADR rates, the MVL process, and even New Zealand’s transitional resident exemption, are all subject to change. Governments in both the UK and New Zealand have a habit of tweaking tax policies, especially when budgets are tight or political priorities shift.
Just in the past few years, we have seen the BADR (formerly Entrepreneurs’ Relief) rate increase, the annual CGT exemption decrease, and regular adjustments to income tax bands and dividend rates. New Zealand’s transitional resident rules, while generous now, could also be reviewed in future. Tax reliefs that exist today might not be available next year, or could be changed with little notice.
Timing Is Everything
Finally, remember that timing is crucial. You must meet the two-year qualifying period for BADR, and you have three years from the true cessation date to close the company and still qualify. Keep careful records, plan ahead, and get advice early to avoid missing out.
Conclusion: Your Path, Your Choice
Closing down your limited company is a big milestone, and as Sarah and Tom’s stories show, there is no one-size-fits-all answer. For UK-based contractors with significant funds left in the business, an MVL combined with Business Asset Disposal Relief remains the most tax-efficient route. But if you are moving back to New Zealand after a long spell away, the transitional resident rule gives you a valuable alternative that could save you thousands.
The rules can seem daunting, but understanding your options is the first – and most important – step. With the right advice and a little planning, you can make a choice that suits your circumstances and leaves you with more money in your pocket.
Planning to close your company? Get in touch with us early. We can run the numbers and help you find the most tax-efficient path for your unique situation.