Issues for OMBs - unincorporated business disposals and incorporation Flashcards
Implications of business to a third party
IT
CT
CGT
CA’s (P+M)
Stock
SBAS
CGT
IFAs
SD/SDLT
IHT on gift
VAT
Income tax:
Cessation of trade rules apply - any remaining transitional profits arising from 23/24 are charged on cessation of trade
Loss relief - Terminal loss relief, current v prior yr relief vs total income (can extend to CGs)
Corporation tax - NA
CAs (P+M) - BA/Bc on disposal of assets at MV
SBAs - No BA/BC arises on disposal + add any SBAs claimed to date to proceeds in gain calculation +SBAs continue at same annual rate for purchaser
Stock = Disposal at MV = trading income
CGT :
Assets disposed of at MV at cessation leading to capital G/L on chargeable assets (Usually L+B and GW - also fixed O&M/other IFAs)
Capital losses on P+M not allowed as given relief via CAs
AEA and CL’s may be available to shelter gains
BADR may apply to net gains assuming business owned two years (£1m lifetime limit)
Consider availability of ROR, EIS, SEIS to defer or exempt gains if qualifying reinvesment of proceeds made
IFAs - Capital G/L on disposal + Purchase price becomes base cost for purchaser
SD/SDLT - SDLT payable by purchaser on consideration paid for L+B
IHT on gift of business - BPR available at 100% if owned 2 years
VAT - TOGC likely to apply + Consider VAT implications of any property included in TOGC and CGS if appropriate
Implications of business to a company (incorporation)
IT
CT
CGT
CA’s (P+M)
Stock
SBAS
CGT
IFAs
SD/SDLT
IHT on gift
VAT
IT:
- Cessation of trade rules apply - any remaining transitional profits arising from 23/24 are charged on cessation of trade
- Loss relief: Terminal loss + Cy/Py v total income (extend to CGs) + Cfwd against income from company ]
- Profit extraction from company as divs / salary
- Operate PAYE on profits extracted as salary after incorp
- Personal service company or MSC leg may apply (unlikely if HMRC treated as trade prior to incorp)
CT - new company commences to trade + likely to be a close company
CAs (P+M) : BA/BC on disposal at MV (default) + ‘Succession’ election to transfer assets at TWDV possible if sole trader now controls company - connected party
SBAs:
No BA/BC arises on disposal
+
No adj to gains calc for SBAs claimed by ST - ALL SBAs added to gain on future sale by co
+
SBAs continue at same annual rate for company as for sole trade/pship
STOCK = disposal MV = trading income (default) or can elect to trfer at higher of cost and actual sales proceeds
CGT:
Assets disposed of at MV at cessation leading to capital G/L on chargeable assets (Usually L+B and GW - also fixed O&M/other IFAs)
Capital losses on P+M not allowed as given relief via CAs
Incorporation relief (IR) defers gains into shares and is automatic if conditions met
can disapply IR
If consideration not in shares or IR disapplied - BADR can be claimed to reduce CGT to 10% but not in relation to goodwill on incorporation unless own >5%
GR available if not all assets tfered:
- deduct gains from cost of assests in company
-requires gift of relevant asset to company rather than exchange for shares
Consider retaining appreciating property (use GR not IR for other assets trfered)
On disposal of shares, 2 yr owship requirment applies to owship of business prior to incorporation
IFAs - Capital G/L on disposal + Goodwill is IFA but amort is disallowable + Other IFAs acquired qualify for amortisation
SD/SDLT :
Deemed transfer of land and MV giving rise to SDLT on charge even if no consideration
Retain property to save SDLT
IF building transferred and VAt is charged, SDLT on gross MV
No SD on issue of new shares by company
IHT on gift of business :
Unincorporated business attract BPR at 1005%
Shares in company should attract 100% BPR
No BPR on property used by but not owned by company unless owner has control of company BPR 50%
VAT:
TOGC likely to apply
Consider VAT implications of any property included in TOGC and CGS if appropriate
Company can takeover VAT reg no. of unincorp business
Incorporation relief
Conditions
effect
Conditions
Applies automatically to defer chargeable gains arising on the transfer to a company of chargeable assets used in a sole trade or partnership - providing following met:
- Business transferred as a going concern
- All the assets of business (except cash) are trfered to company
- Consideration received is wholly or partly in shares
Effect:
Deferred gains reduce base cost of shares recieved
If consideration wholly shares - all gaisn deferred
if partly shares, gain defered = MV shares/total consid x net gains
cash consideration may be manipulated to leave a gain covered by a capital loss or the AEA
Proformas Incorp relief
For each asset trfered
Add together for all assets
Base cost shares
Each asset
Proceeds MV
Cost (X)
G/l X/(X)
add together all assets
Net gains X
Relief (MV shares/total consid (X)
x net gains)
Chargeable now X
BAse cost shares
MV of share consid at incorp X
Less IR (X)
CGT base cost X
Disapplication IR
IR automatic if conditions met, can elect to disapply relief
Useful when :
- Net gains covered by AEA and available capital losses
- Unincorporated business qualifies for BADR + Indiv plans to sell shares under circumstances where BADR would not be available
However BADR cannot be claimed on gains on goodwill on incorp - unless individuals SH in new co is less than 5%
Incorp relief or gift relief
Substantial chargeable gains likely on goodwill and L+B but:
-If gain on any goodwill is small - may be covered by AEA
- IF L+B retained outside of business, may only be necessary to use gift relief on any P+M not otherwsie exempt
- Where incorp relief preferred it is possible to:
. Grant a lease on the property to the unincorporated business
. Transfer lease to company (ensures all assets trfered for IR)
. Retain free hold outside of the business
GR allows some assets to be trefred and some to be retained personally
Most likely asset to be retained is L+B:
+Avoids SDLT
+Avoids doublt tax charge on eventual sale of property
+Enables profit extraction (rent), however;
rent may reduce BADR on disposal of property as an associated disposal to sale of shares
Rent not subject to NI
Subject to IT at maximum 45%
allowable against CT unlike dividends
Close company
def
what isnt close
Participator meaning
Director meaning
associates
Company under control of:
- 5 or fewer participators
OR
- Participators (any number) who are directors
NOT CLOSE where:
a) quoted company - at least 35% of VR controlled by public
OR
controlled by one or more other companies which they themselves are not close
Participator - has interest in capital or income of company including director
Director includes any person occupying position of director (whatever name given for that position) + Any person who is a manager and owns 20% or more of OSC of the company
ASSOCIATES:
interests of associates of a participator when determining whether control of the company exists
a) Relatives (no inlaws) Parents, kids, spouse, siblings
b) Business partners
c) Trustees of any settlement if SH or relative (living or dead) was creator
d) Trustees of any trust or personal representatives of an estate which has shares or obligations of the company where the participator has an interest in those shares or obligations
Loans and benefits to participators
what is it
who does it apply to
due date
repayment / write off?
does not apply to
if participator is employee
Useful image on pg 152
Loans :
Notional tax 33.75% applies when a close company makes a loan to:
1) one of its participators or associate of P
2) Trustees of settlement where either Trustee or B is a P or associate of a P
3) An LLP or pship in which a Participator or associate is a partner
Tax payable on CT liability date - 9 m 1 day after end of AP in which loan made
unless large - instalments
if loan repaid before due date no s455 due
if repaid or written off the tax charge repayable on CT due date for AP of write off or repayment
DOES NOT APPLY TO:
- loan made in ordinary course of Cos business in lending money
- Money owed for goods/services supplied by co (unless credit over 6 months)
or - A loan to an employee if:
+loans to that borrower do not exceed 15k; AND
+ Borrower works full time for the close company; AND
+Borrower (on own or with assoc) does not have material interest (>5%)
IF participator is an employee - may be two charges to tax:
S455
and
taxable benefit if cheap loan
if participator is employee and loan written off - amount written off liable to class 1 NIC, even tho charged to IT as dividend
Close company anti avoidance
Loans
both a repayment of at least £5k of a loan made in an earlier period and a new loan of at least £5k made in same 30 day period - repayment treated as repayment of new loan
Loan balance before a repayment was at least £15k and at time of repayment it was intended that a new loan would be made then the repayment is treated as a repayment of the new loan
In either case, repayment is only taken into account to the extent that it exceeds the amount of the new loan
Rules do not apply if the repayment gives rise to an IT charge - e.g. where a dividend is declared to clear a loan balance
Benefits
Where benefit conferred directly or indirectly on a P or associate as part of a tax avoidance arrangement and an IT charge would otherwise apply - a CT charge of £33.75% of the taxable benefit applies
Qualifying interest
if a participator:
owns at least 5% SC; OR
works full time in mgmt of close company; AND
takes out a loan to buy shares in or make a loan to a close company - IT relief available on any interest paid as a deduction from their total income (subject to IT restriction)
relief not available if shares have already been given relief under EIS
