In the light of new dividend tax rule and Off-payroll working rules (IR35) for public organisation, it might be a good idea for small companies to go back to unincorporated structure as business structure should be assessed regularly throughout its business lifecycle rather than just when you are starting your business.
What is disincorporation relief?
Disincorporation relief was introduced by the Finance Act 2013 to help small companies which do not wish to become incorporated any longer and want to transfer their business and assets to shareholder as a sole trader/ partnership with very less hassle. The main aim is to remove capital gain tax on transfer of qualifying assets and goodwill.
The relief was available since 1 April 2013 and will lapse after 31 March 2018 due to very less claims made out of estimated 600,000 eligible companies.
How to claim this relief?
- If assets are transferred at reduced value for capital gain purpose, a joint claim should be made by the company and its shareholders. In this way, company will pay £Nil corporation tax on this transfer.
- The claim must be filed to HMRC within 2 years of the transfer date
What are the criteria to qualify?
- The business should be transferred as a going concern basis
- All the qualifying business assets (except cash) should be transferred.
- Qualifying assets include goodwill and land & building which is not held as inventory.
- The value of assets included in the transfer should not cross £100k.
- The transfer should be made to its shareholders who are individuals.
- Unincorporated entity should be held by some, not essentially by all.
- Those shareholders should own their shares for at least 12 months.
The base cost of transferred asset will be its transfer value for the subsequent disposal for capital gain tax purpose.
Expect minimising capital gain tax on transfer, there is a measure available to make £Nil balance charge on tax written down value of fixed assets and closing inventories. The transfer value of land and building can be lower of cost and market value.
What are its disadvantages?
Any unutilised carried forward losses of limited company cannot be transferred to unincorporated entity to utilise against its future profits.
Liquidation can better option for higher rate taxpayers than disincorporation as they will pay less capital gain tax on distribution via entrepreneur’s relief i.e. 10%.
For more information or advice, please Contact Us.
By Roshan Malla