Disincorporation relief was introduced from 1 April 2013 and removes certain tax barriers that previously existed when companies transferred from incorporated status to sole trader or partnership status.
This relief provides a time-limited opportunity for small companies and their shareholders to make a joint claim for qualifying business assets to be transferred from the company to one or more of its shareholders with no immediate corporation tax charge on the company. The relief is a form of roll-over or deferral relief as tax will still have to be paid at some later date.
Nature of relief
- Allows a company to transfer its goodwill and land to its shareholders without a corporation tax charge arising on the transfer;
- Requires the transfer of the company’s business, as a going concern, to its shareholders;
- Does not apply to stock or work in progress;
- Only applies to companies with qualifying assets with a total value of up to £100,000 (‘qualifying assets’ are goodwill and land and buildings used in the business).
The relief does not extend to any income tax charges that might arise on the shareholders where the company’s assets are distributed to them.
The assets transferred to the shareholders will be treated as dividends in specie. As long as this does not push the shareholders into the higher rate there will be no further income liability for the shareholders. Higher and additional rate payers will face an income tax charge.
The shareholders to whom the business is transferred must be individuals who have held shares in the company throughout the 12-month period ending with the business transfer date.
A claim to disincorporation relief allows qualifying assets to be transferred below market value so that no corporation tax charge arises to the company. The shareholders accept the reduced transfer value for all future capital gains computations. Shareholders to whom the assets are transferred will inherit the transfer value for the purpose of capital gains tax and the shareholders must use this transfer value in any subsequent transactions. In effect, the gain or profit that would have arisen to the company will be deferred until the disposal of the assets by shareholders.
As claims are made jointly by the company and shareholders within two years of the business transfer date. A claim cannot be made if the company has already been closed down (struck off or wound up).
Benefits of the relief
There will be on-going savings for companies choosing to disincorporate – for example, there will be no requirement to submit a corporation tax return to HMRC and possibly no requirement to operate PAYE. In addition, it will no longer be necessary to file annual returns and statutory accounts with Companies House. Businesses may also be eligible to use the cash basis for unincorporated businesses, simplifying their tax calculations.