If you want to change your limited company status to that of a sole trader, you need to know about disincorporation relief.

It’s something very few businesspeople know about and a recent Office of Tax Simplification study showed that fewer than 50 claims had been made in the three years between its introduction and March 2016.

There are two more years left before the fate of disincorporation relief is known. Either it will die via the sunset clause it was given when introduced or it will be extended for another 5 years. The Chartered Institute of Taxation are calling for it to remain with improved marketing to boost the uptake, as reported in Accountancy Age.

So, how does disincorporation tax work and is it right for you and your circumstances?

Disincorporation relief – transfers of assets

Normally, transfers from a limited company to its shareholders are treated as taking place at market value for tax purposes regardless of the actual amount paid by the shareholders.

In some cases, this would result in the company paying a Corporation Tax charge when the market value of the asset is more than its original cost or the cost minus the amount of tax written down value.

What disincorporation relief allows is below-market-value transfers to take place so that no Corporation Tax charge arises. As an individual, you then accept the reduced value of the transfer for any future capital gains tax computations.

Disincorporation relief – what qualifies for disincorporation relief?

“Qualifying transfers” for disincorporation relief require all of the following conditions to be met in the transaction:

• the shareholder(s) to whom the business is transferred to are individuals (not corporate shareholders) and that the business is transferred as a going concern,

• the business must be transferred together with all of the business’s assets or together with all the assets of the business other than cash,

• the maximum value of the total market value of the assets must be £100,000 or less, and, and

• the shareholders benefiting must have held their shares in the business for the whole 12 months before the transfer.

What are “qualifying assets” They can be:

• land (except land held as trading stock), and

• goodwill.

Other assets like plant, stock, or the value of your debtor book aren’t qualifying assets.

Disincorporation relief – are you eligible?

Disincorporation relief only applies to transfers between 1 April 2013 and 31 March 2018.

Transfers can only be made to individuals who are in unincorporated partnerships so that means that you can’t use disincorporation relief to transfer qualifying assets to a Limited Liability Partnership.

Disincorporation relief – how to claim disincorporation relief

Both the company and the shareholders receiving assets must claim disincorporation relief at the same time. Claims must be made within 2 years of the transfer date but they can’t be made if the company has been struck off or wound up.

You treat the transfer value as the cost of the asset for when you’re calculating any personal profit you make if you later sell it on for Capital Gains Tax.

The transferor (the limited company) must make its claim as part of the Company Tax Return for the period when the transfer takes place. If a company is making a claim as part of the online filing process, you will need to complete the disincorporation relief claim form and attach it to your company tax return.

• Disincorporation relief – claiming if you’ve not received a notice to file or you wish to amend your Company Tax Return

In either of these cases, fill in the disincorporation relief claim form online, print it off, and post it to Corporation Tax Services, HM Revenue and Customs, BX9 1AX.

You can alternatively choose not to fill in the form, write to the above address, and include:

• the name, address, Unique Taxpayer Reference (UTR), and company registration number of the company assets were transferred out of,

•  the name, address, UTR, and National Insurance number of each shareholder who has received (part of) the transfer,

•  the transfer value of each qualifying asset for each shareholder who has had the business transferred to them,

•  the date of the transfer, and

•  a declaration that the business has been transferred with all of its assets or, if it hasn’t, that it has been transferred with all of its assets except the company cash.

Disincorporation relief – income tax and capital gains tax

As a shareholder, you may still have to pay income tax or capital gains tax on the transfer of the assets to you from the company. If you sell it later on, you may also have to pay capital gains tax.

Disincorporation relief – is it for you?

In their report on disincorporation relief, the Office of Tax Simplification noted that many may consider the £100,000 limit too low and that the costs and hassle involved in disincorporation may be too high a cost when weighed against any potential benefits.

This is a complex area of taxation so we would strongly encourage you to use us to work out the most effective ways in time, taxes, and fees of disincorporation, if this is what you’ve made up your mind to do.

Speak to one of the team on 01606 333 900 or email us at hello@burtonbeavan.co.uk.