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Budget stuff  •  Business Services  •  Business Tax  •  Personal tax  •  Tax Planning  •  Tax Relief

Tax relief opportunities on disincorporation – effective from April 2013

By RJP LLP on 19 April 2013

The issue of whether or not to incorporate your business into a limited company is a topic previously discussed in our blog. There can be clear tax planning advantages to incorporation as it creates flexibility over levels of income chargeable to personal tax, and prevents profits immediately becoming chargeable to tax at the highest personal tax rates. There are other, commercial benefits too.

However, for some businesses incorporation does not work out to be a beneficial option. For instance, many small businesses incorporated in order to save tax in the mid-2000s, following the introduction of the zero per cent rate of corporation tax in 2002-03, only to find the zero rate was then abolished because, as the then Government found, companies were taking advantage of the tax saving opportunities! Those company owners may subsequently have wished to disincorporate their business, only to find it was a very difficult procedure, fraught with tax charges. As a result, they may find their business is ‘trapped’ within a corporate structure.

Another reason for wanting to disincorporate may be to avoid the additional administrative and regulatory requirements of being a limited company, especially if profits are decreasing and the tax benefits offered by sheltering profits within a company are no longer so beneficial. In addition, for business owners who are not used to maintaining a clear distinction between their business finances and personal cash, financial administration can be simpler outside a company and for this reason they may find it easier to operate outside the legal structure of a company entity.

Historically, disincorporating a company has attracted tax charges, because the valuable reliefs which are available when you incorporate a business have not been available where you disincorporate it. Therefore it could be a costly exercise for a limited company to reverse its decision to incorporate. Now, following a detailed consultation process, and with effect from 1 April 2013 for a period of 5 years, a new ‘disincorporation relief’ has been introduced by the Government.

This new tax relief has been designed to help avoid the tax charges incurred by companies who want to change their status into a non-corporate structure; for example sole trader or partnership. The relief applies only to companies which have assets with a value of less than £100,000 – estimates from the Treasury suggest this is approximately 40% of all companies registered in the UK.

There are certain qualifying conditions which must be met to take advantage of this new disincorporation tax relief. These are complex and a detailed discussion of the qualifying criteria is beyond the scope of this blog. Instead, we have summarised what is most significant for business owners to be aware of. If you are interested in the possibility of disincorporating your company, these conditions will apply and it will be worth having a more detailed discussion with us to see if the use of this option might be applicable to your own circumstances.

Criteria to qualify for disincorporation relief

 

Below is a simplified summary of the main eligibility criteria:

  • The company must have been operational for 12 months;
  • An incorporated business must transfer some/all of the trading business to the existing company shareholders as a going concern;
  • The transfer must become effective within 5 years of March 31st 2013;
  • All assets (including goodwill, capital assets, trading stock and cash), must be included in the transfer and the value of the assets must be no greater than £100,000;
  • Recipients of the new ‘disincorporated’ entity must either be individuals or partnership members; they cannot be members of an LLP.
  • All shareholders must have owned their shares for at least 12 months before the transfer is made (so an incorporated business cannot be less than 12 months old before being eligible for disincorporation relief).

 

If you are interested in considering disincorporation as an option please contact Lesley Stalker by emailing las@rjp.co.uk.

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The issue of whether or not to incorporate your business into a limited company is a topic previously discussed in our blog. There can be clear tax planning advantages to incorporation as it creates flexibility over levels of income chargeable to personal tax, and prevents profits immediately becoming chargeable to tax at the highest personal tax rates. There are other, commercial benefits too.

However, for some businesses incorporation does not work out to be a beneficial option. For instance, many small businesses incorporated in order to save tax in the mid-2000s, following the introduction of the zero per cent rate of corporation tax in 2002-03, only to find the zero rate was then abolished because, as the then Government found, companies were taking advantage of the tax saving opportunities! Those company owners may subsequently have wished to disincorporate their business, only to find it was a very difficult procedure, fraught with tax charges. As a result, they may find their business is ‘trapped’ within a corporate structure.

Another reason for wanting to disincorporate may be to avoid the additional administrative and regulatory requirements of being a limited company, especially if profits are decreasing and the tax benefits offered by sheltering profits within a company are no longer so beneficial. In addition, for business owners who are not used to maintaining a clear distinction between their business finances and personal cash, financial administration can be simpler outside a company and for this reason they may find it easier to operate outside the legal structure of a company entity.

Historically, disincorporating a company has attracted tax charges, because the valuable reliefs which are available when you incorporate a business have not been available where you disincorporate it. Therefore it could be a costly exercise for a limited company to reverse its decision to incorporate. Now, following a detailed consultation process, and with effect from 1 April 2013 for a period of 5 years, a new ‘disincorporation relief’ has been introduced by the Government.

This new tax relief has been designed to help avoid the tax charges incurred by companies who want to change their status into a non-corporate structure; for example sole trader or partnership. The relief applies only to companies which have assets with a value of less than £100,000 – estimates from the Treasury suggest this is approximately 40% of all companies registered in the UK.

There are certain qualifying conditions which must be met to take advantage of this new disincorporation tax relief. These are complex and a detailed discussion of the qualifying criteria is beyond the scope of this blog. Instead, we have summarised what is most significant for business owners to be aware of. If you are interested in the possibility of disincorporating your company, these conditions will apply and it will be worth having a more detailed discussion with us to see if the use of this option might be applicable to your own circumstances.

Criteria to qualify for disincorporation relief

 

Below is a simplified summary of the main eligibility criteria:

  • The company must have been operational for 12 months;
  • An incorporated business must transfer some/all of the trading business to the existing company shareholders as a going concern;
  • The transfer must become effective within 5 years of March 31st 2013;
  • All assets (including goodwill, capital assets, trading stock and cash), must be included in the transfer and the value of the assets must be no greater than £100,000;
  • Recipients of the new ‘disincorporated’ entity must either be individuals or partnership members; they cannot be members of an LLP.
  • All shareholders must have owned their shares for at least 12 months before the transfer is made (so an incorporated business cannot be less than 12 months old before being eligible for disincorporation relief).

 

If you are interested in considering disincorporation as an option please contact Lesley Stalker by emailing las@rjp.co.uk.