Incorporation

Question 1

Income tax

Answer 1

Incorporation of the business will bring about the cessation of the sole trade/ partership ofr tax purposes.

The sole trader / partner will be accessed on profits for the period … for the tax year …
minus any overlap profits brought forward.

Question 2

Stock

Answer 2

Stock is deemed to be sold to the company at its market value, or a joint election can be made for it to be transferred at the lower of cost or proceeds. (delays when the profit is made)

The election needs to be made no later than 12 months following the filing deadline for the tax year.

Question 3

Capital allowance

Answer 3

No AIA or WDA allowance can be claimed in the year of cessation

The company pays the partnership/ soletrader for any P&M the value is the actual proceeds received.

If a balancing charge is likely a joint election can be made to transfer the P&M at the TWDV. The joint election needs to be made before 2 years from the date of transfer

If balancing allowance is likly ensure proceeds = £1 (tax saving at 20% / 40%/ 45%)

Question 4

Capital Gain

Answer 4

The transfer of assets into a company is a deemed disposal of assets for capital gains purposes. The deemed disposal is at market value

Chargeable asset - property/ goodwill. Not current asset or creditors

Question 5

Incorporation relief conditions / how does it work

Answer 5

Incorporation is an automatic relief if the following conditions are met.
-The business is a going concern
-All assets except cash are transferred
-The consideration for the transfer of the business is entirely in the form of shares

Defers the gain by reducing the base cost of the shares. When the shares are sold the gain is uplifted.

Question 6

Restrictions

Answer 6

Incorporation relief is restricted if part of the conideration is not in the form of shares.
If 100% of the consideration is in the form of shares 100% incorporation relief is allowed

Incorpoartion relief is restricted by the following formulae
gain *(Consideration in shares/ Total consideration)

Question 7

Disapply

Answer 7

Can elect to disapply incorporation relief if for example you have capital losses to utilise/ AEA/ BADR
Think why might the shareholder not have BADR in future (not employee/ not 5% shareholder)

Question 8

Goodwill

Answer 8

Goodwill disposed of to a closed company where the sole trader holds 5% or more share capital/ profit share/ voting rights and assets distributable on winding up then BADR is not available.

Question 9

Losses

Answer 9

S64 CY / PY
S71 CY then against CGT
S89 Terminal loss relief carry back upto 3 years on a LIFO basis
Unlikely to incorporate business if loss making as loss relief for individual is much more flexible.

Question 10

Special Loss rule

Answer 10

S86 if 80% of consideration is in the forms of shares and the individual still owns the shares and the company is still trading any individual losses can be offset against income received from the Ltd (wage/ dividends)

Question 11

BADR

Answer 11

Will be eligible for BADR as long as the conditions apply. Remember 2 year rule !!