Disincorporation Relief Print
When a company disposes of any chargeable assets, this will normally trigger a charge to corporation tax on the chargeable gain it makes on the disposal. Disincorporation Relief was introduced to allow a company to transfer certain types of assets to its shareholders who then continue to operate the trade in an unincorporated form without the company incurring a Corporation Tax charge on the disposal of the assets.
From April 2013, and for a limited period of 5 years, joint claims may be made by a company and its shareholders so that the transferor company pays no corporation tax on the disposal of its relevant business assets to some, or all of its shareholders. The claim for relief must be made within the period of 2 years following the transfer of the business.
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.
Qualifying assets are interest in land (other than land held as trading stock) and goodwill.
The treatment of goodwill depends upon whether the company commenced trading before 1 April 2002, or on or after that date, when the tax treatment of intangible fixed assets changed. (See section on Intangible Fixed Assets). Where Disincorporation Relief is claimed, and the intangible asset is a pre April 2002 asset, then goodwill is treated in the same way as other chargeable assets.
Where the company commenced trading on or after 1 April 2002 the transfer of goodwill is treated in the following way so that no tax liability arises to the transferor, but the value used for these purposes is also the base cost to the transferee on which future gains are based:
- If the goodwill has been written down for tax purposes, then the transfer value is lower of the tax written-down value, and its market value;
- If the goodwill is included in the balance sheet, but has not been written down for tax, then the transfer value is the lower of cost or market value;
- If the goodwill is not included on the balance sheet (being internally created goodwill, or written down to £nil) then the proceeds are treated as £nil.
All the transferees must be individuals who have held their shares in the company continuously for a period of at least 1 year immediately prior to the transfer of the business.
The relief is only available for companies whose qualifying assets do not exceed £100,000, and claims for disincorporation relief can be made where the transfer takes place between 1 April 2013 and 31 March 2018.
These rules do not cover the disposal of other assets held by the company, and there are no new provisions in respect of the disposal of trading stock, so the normal rules apply. This means that, as the transfer is between connected persons the disposal will be treated as taking place at market value.
Disturbingly, the rules do not include any relief for the shareholder, so there is likely to be a tax charge either on an income distribution from the company to the shareholder, if the company is not terminated, or a capital gain if the company is wound-up, or liquidated. Without some form of relief to the shareholders this relief is not likely to be widely used.