Last updated: 19 October 2026
Disincorporation means moving a business out of a limited company and running it as a sole trader or partnership instead. Owners usually consider it when the company’s profits have fallen, the paperwork no longer feels worth it, or tax changes (such as higher Corporation Tax and dividend tax rates) have reduced the benefits of a company. Disincorporation can be expensive in tax terms, so it needs careful planning. This guide covers the tax consequences for the company and its shareholders and the options for closing the company.
Is There Still a Disincorporation Relief?
No. A special disincorporation relief, which let small companies transfer goodwill and land to their shareholders without an immediate Corporation Tax charge, was available from 1 April 2013 to 31 March 2018. It has not been replaced, so the normal tax rules now apply.
Tax Consequences for the Company
The company and its shareholders are connected, so assets transferred to them are treated as sold at market value, whatever is actually paid.
- Goodwill and intangible assets – for goodwill created or acquired from 1 April 2002, the profit on transfer is taxed as income of the company at its Corporation Tax rate (19% on profits up to £50,000, 25% above £250,000, with marginal relief in between).
- Land and buildings – any gain is subject to Corporation Tax. The new owner may also pay Stamp Duty Land Tax on the market value.
- Plant, machinery and vehicles – a transfer at market value can trigger balancing charges. Because the parties are connected, they can usually elect for assets to pass at their tax written-down value, avoiding a charge.
- Stock and work in progress – normally valued at market value, but connected parties can elect to use the higher of cost or the price actually paid.
- Trading losses – unused company losses cannot be passed to the new sole trader or partnership.
- VAT – a transfer of the whole business as a going concern is normally outside the scope of VAT if the new owner is, or must become, VAT-registered.
Practical Steps for the New Business
- Register as self-employed with HMRC or set up a partnership, and register for VAT if needed.
- Transfer employees under TUPE, and set up a new PAYE scheme if you will be the employer.
- Move contracts, bank accounts, insurance and licences into your own name.
- Check whether Making Tax Digital for Income Tax applies: sole traders with qualifying income over £50,000 have had to use it since 6 April 2026, falling to £30,000 from April 2027 and £20,000 from April 2028.
Options for Closing the Company
Striking Off (Voluntary Dissolution)
Once the business has been transferred and the company has stopped trading for three months, the directors can apply to strike it off using form DS01 (£13 online or £18 on paper). Distributions made in anticipation of striking off are treated as capital if the total is £25,000 or less. Above that, the whole amount is taxed as a dividend at 10.75%, 35.75% or 39.35%, after the £500 dividend allowance.
Members’ Voluntary Liquidation
For larger reserves, a members’ voluntary liquidation (MVL) through a licensed insolvency practitioner allows distributions of any size to be treated as capital. Gains may qualify for Business Asset Disposal Relief at 18% for disposals on or after 6 April 2026 (14% in 2025/26), up to the £1 million lifetime limit, or otherwise CGT at 18% or 24% after the £3,000 annual exempt amount.
Tax Issues for the Shareholders
The Anti-Avoidance Rule for Winding Up
This is the biggest risk in disincorporation. A targeted anti-avoidance rule (TAAR) can tax a capital distribution from a winding up as a dividend instead. It can apply if you held at least 5% of a close company, you continue a similar trade or activity within two years of the distribution, and one of the main purposes was to avoid Income Tax. Carrying on the same business as a sole trader is exactly the situation the rule targets, so the reasons for disincorporating, and the evidence for them, matter.
Director’s Loan Accounts
An overdrawn director’s loan must be repaid or written off before closure. A loan written off is taxed on the shareholder as a distribution, and if it is still outstanding nine months after the year end the company pays s455 tax at 35.75% for loans made on or after 6 April 2026. See our guide to s455 tax.
Paying Personal Tax Instead of Corporation Tax
As a sole trader you pay Income Tax at 20%, 40% or 45% on all profits, plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above, whether or not you draw the money. Compare this with your current mix of salary and dividends before you decide. Our guide to salary vs dividends shows the company side.
Is Disincorporation Right for You?
It can make sense for a business with low profits, few assets and little goodwill, where the company’s running costs outweigh the tax savings. It rarely works well where the company owns valuable property or goodwill, or has large retained profits. If you are weighing up the opposite move, see changing from sole trader to limited company.
Frequently Asked Questions
Can I transfer my company’s business to myself tax-free?
Not usually. The transfer is treated as taking place at market value, so there can be Corporation Tax on goodwill and property, and you may pay tax when you extract the company’s reserves.
How much can I take out before striking off the company?
Distributions of up to £25,000 in total can be treated as capital. If you go over that limit, the whole amount is taxed as a dividend, so a members’ voluntary liquidation is often better for larger sums.
Does the TAAR stop me running the same business as a sole trader?
No, but it may mean the final distribution from the company is taxed as a dividend rather than as a capital gain if one of the main purposes was to avoid tax.
How long does disincorporation take?
Transferring the business can happen quickly, but striking off takes at least three months after trading stops, and the Companies House process then takes around two months more.
Get Advice Before You Disincorporate
Accotax helps owner-managed businesses decide between running as a company or as a sole trader, value the business, and close companies tax-efficiently. Speak to our limited company accountants or contact us to book a call.
Partner Note: CTA 2009, Part 8 and s. 167; CAA 2001, s. 266; CTA 2010, ss. 1030A–1030B; ITTOIA 2005, s. 396B; TCGA 1992, s. 17.
