Disincorporation - transferring your business from a limited company to a sole trader or partnership
February 2006
This article is not a recommendation that you move your limited company business into an unincorporated, sole tradership or partnership. It is merely a brief summary of some of the tax effects if you do decide to disincorporate.
There are likely to be other issues, some commercial, some tax related that would need to be considered. Points to be aware of:
Once you have passed a resolution to wind up the company, bringing to an end the current chargeable accounting period, the following matters would need to be taken into account.
1. Corporation tax will be payable nine months after the date of the resolution, as a new accounting period has now started and the company remains liable until it has been fully wound up.
2. VAT registration of the dissolved company can be taken over by its unincorporated successor, but this is generally inadvisable. It may be best to leave the liabilities, both known & unknown, with the old business.
3. Elections can be made to transfer any plant and machinery and industrial buildings to shareholders at tax written down values as long as these elections are made within two years of transfer of trade. However this may not always be the best solution. Clients should also value plant and equipment at a realistic market value to see if this produces a better tax result.
4. Trading stock and professional work in progress can be transferred at market value.
5. Care must be taken in the allocation of trading losses, which can only be offset against income of the company before it is dissolved, although in some instances may be offset against trading profits of the preceding 36 months.
6. If possible, assets which may realise a chargeable gain should be sold before disincorporation - if the company has made trading losses in the same accounting period. It is not possible to offset trading losses against these chargeable gains after cessation of trading.
7. Likewise with loans that have been made by the company to its directors - repayment should usually be made before winding up to avoid the loan being treated as a benefit in kind.
8. Distributions of dividends and/or capital must be made at the optimal time, as they will affect capital gains tax, the personal tax positions of shareholders and the value of the company at cessation. Generally speaking distributions to shareholders are treated as income (dividends) prior to winding up, and as capital payments subject to capital gains tax during winding up.
9. If the company has been making profits, the valuation of goodwill requires consideration and may be a barrier to disincorporation as an unattractive tax liability may arise.
10. It is important that winding up is achieved as quickly as possible. The shares in the company will be non-business assets for taper relief purposes during this time - so business asset taper relief otherwise available will be diluted.
As indicated at the beginning of this article there are many other considerations which need to be taken into account when considering the disincorporation of a business. Tax legislators are constantly "moving the goal posts"! However if you would like more information on this topic please give us a call.
