View the related Tax Guidance about Incorporation relief
Capital gains tax implications of incorporation
Capital gains tax implications of incorporationThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the capital gains tax aspects.The transfer of business assets by an individual to a company controlled by them is a disposal for capital gains tax purposes. The disposal is deemed to take place at market value because the sole trader and the company are ‘connected persons’. The sole trader will therefore have a capital gain on the chargeable assets at the point of incorporation. The chargeable assets will usually be land and buildings, and possibly goodwill. It is unlikely that gains will arise on other assets such as plant and machinery as these will either be standing at a loss (for which relief is given via the capital allowances computation) or at a gain, which will be exempt under the chattels rules.The CGT liability arising on the disposals can be deferred by claiming one of two possible CGT reliefs:•incorporation relief (otherwise known as roll-over relief on the transfer of a business to a company), or•gift relief (otherwise known as hold-over relief)TCGA 1992, ss 162, 165Alternatively, a capital gain could be realised by an outright sale and a claim made for business asset disposal relief (BADR), if available, to obtain a 10% tax rate.For further reading on capital gains aspects of incorporation, see Simon’s Taxes Division B9.1 and HMRC’s guidance at CG65700C and CG68050.Incorporation reliefThere are three conditions to be satisfied
Deferral of capital gains via reinvestment
Deferral of capital gains via reinvestmentWhy defer a gain?An individual’s net taxable income and chargeable gains for the tax year influence the rate of tax payable on their capital gains. See the Introduction to capital gains tax guidance note.Depending on the nature of the asset that is subject to disposal, this can result in the individual paying capital gains tax (CGT) at 20% or 28% (reduced to 24% from 6 April 2024 onwards) in tax years where their taxable income and gains exceed the basic rate band, but only 10% or 18% on gains in years where their net income and gains are lower than that band. If a gain is covered by the annual exemption, no CGT is due. See the Introduction to capital gains tax guidance note.The basic rate band is £37,700 for the 2023/24 and 2024/25 tax years, but this may be extended by personal pension contributions or donations to charity via gift aid. See the Proforma income tax calculation guidance note.The annual exemption is £6,000 for 2023/24 and £3,000 for 2024/25. To optimise their CGT position, a taxpayer can reinvest the proceeds from the sale of an asset into the purchase of a qualifying asset and elect for the gain to be rolled into those replacement assets.When the replacement asset is subject to disposal, or possibly where the investment conditions are broken, the deferred gain falls back into charge to CGT. This may be some years after the original gain arose and in many cases,
Company tax planning
Company tax planningIn addition to considering the tax issues for shareholder, it may be necessary to do some planning for the business to be floated, including:•ensuring that all assets necessary to the running of the business are owed by the company, including intellectual property assets (it is not always clear who actually owns these, particularly where the company has grown over a long time) and real estate•separating out assets or trade which are not necessary for the business that is to be floated•incorporation of the business, where it is not already in a companyThis planning should be done as early as possible, to minimise any associated tax costs.Transfer of assets to the company by shareholdersWhere assets used by the company are owned by shareholders, either as a deliberate policy where the premises are owned by a shareholder as part of tax planning, or accidentally such as where intellectual property developed by a shareholder is used by the company without formal licence or payment of royalties, it will usually be necessary to transfer the assets to the company as the company will usually need to be floated owning all the assets necessary to the business for a flotation to be successful. Investors are rarely keen to
Incorporating a property business
Incorporating a property businessThere are several tax areas where the treatment of a residential property letting business run through a company is different to where such properties are held personally. These differences could have an impact on the overall level of profit for the owner of the property depending on their income requirements and long-term strategy in relation to the property portfolio. This guidance note compares the different tax treatments and, with examples, reviews whether incorporating a property letting business is better than holding it personally.Comparison of tax treatments of individuals and companiesThe comparison of holding a property letting business personally or holding it through a company is summarised below with links to more guidance:Property owned personallyProperty owned by the companyGuidance note linksIncome charged at income tax rates of 20%, 40% or 45%Income charged at corporation tax rate of between 19% and 25% (depending on profit levels)Proforma income tax calculation, Computation of corporation taxCapital gain on sale of residential property charged at 18%/ 24% from 2024/25 (18% / 28% for 2023/24) Capital gain charged at corporation tax rate of between 19% and 25% (depending on profit levels)Introduction to capital gains tax, Corporate capital gains ― overviewSDLT surcharge of 3% on purchases of residential propertySDLT surcharge of 3% on purchases of residential propertySDLT on property acquisitions by individuals ― tax rates, Stamp duty land tax ― basic rules for companies ― tax ratesRestriction on tax relief for finance charges unless
Capital gains of traders ― overview
Capital gains of traders ― overviewCapital gains of traders ― further guidanceLinks to guidance note(s)Incorporation. On incorporation of their business, a sole trader (or the partners in a partnership) will be treated as disposing of the assets transferred to the company. Where beneficial, it may be possible to defer any chargeable gains using incorporation relief, which defers any chargeable gains against the base cost of the company shares, or gift relief, which defers the gains against the base cost of the assets in the companyIncorporation ― introduction and procedureCapital gains tax implications
Business asset gift relief ― restrictions
Business asset gift relief ― restrictionsWhere assets are gifted or subject to disposal at undervalue, the legislation treats the disposal as having taken place for market value proceeds. The transferee’s base cost is the deemed proceeds (ie market value) at the date of the gift, no matter the actual consideration paid. To mitigate the transferor’s cash flow problem where they have capital gains tax (CGT) to pay but may not have received any consideration, business asset gift relief (also known as gift relief or hold-over relief) can be claimed on the gift of qualifying business assets. Gift relief operates to defer the gain by rolling over the capital gain against the base cost of the asset in the hands of the transferee. Essentially, the relief ensures the transferor’s capital gain is passed to the transferee.The conditions for claiming business asset gift relief and the mechanics of a claim for full relief are shown in the Business asset gift relief guidance note. It is recommended to read that guidance note before continuing.This guidance note considers occasions where either the amount of gift relief is restricted or where the amount of the gain qualifying for gift relief is restricted. In either of these cases, this means a proportion of the gain remains chargeable following the gift relief claim, therefore this guidance note also considers the interaction of gift relief with other CGT reliefs.The restrictions depend on the type of asset and are summarised in an interactive flowchart. Alternatively, for a static
Weekly tax highlights ― 4 March 2024
Weekly tax highlights ― 4 March 2024Direct taxesUpdated lifetime allowance guidance newsletter ― February 2024The newsletter has been updated to explain the conditions where event number 24 applies.Finance Act 2024, Sch 9, para 106 introduced new event number 24 which only applies where either:•a lump sum (other than a lump sum death benefit) paid exceeds an individual’s available allowances (or would have done had the individual not been relying on a protection or an enhancement)•a lump sum death benefit paid exceeds an amount equal to the individual’s lump sum and death benefit allowance of £1,073,100 as set out in section 637R (this reporting requirement does not require any assessment of an individual’s available lump sum and death benefit allowance)The Act also details the information that needs to be included in the Event Report.SI 2024/249 The Social Security (Contributions) (Limits and Thresholds, National Insurance Funds Payments and Extension of Veterans Relief) Regulations 2024These regulations also allow for payments of a Treasury Grant not exceeding 5% of the estimated benefit expenditure for the 2024/25 tax year to be made into the National Insurance Fund and make corresponding provision for Northern Ireland. In addition, this instrument extends the availability of the zero-rate relief on secondary Class 1 contributions for employers of veterans for the tax year 2024/25.SI 2024/247 The Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2024These regulations increase annual rates of Working Tax Credit elements, Child Tax Credit elements and Working Tax Credit income threshold from 6
Other capital gains business asset reliefs
Other capital gains business asset reliefsThis note deals with the following types of business asset reliefs:•rollover relief on replacement of business assets•incorporation relief•capital gains tax (CGT) deferral relief under the enterprise investment scheme (EIS)•CGT reliefs on company reconstructions•losses on loans to tradersSo-called ‘business’ hold-over and business asset disposal relief (formerly entrepreneurs’ relief), are dealt with in the Holdover relief for disposals by trustees and Business asset disposal relief (entrepreneurs’ relief) ― trusts guidance notes.Except where noted otherwise, these reliefs are available both to personal representatives and to trustees. For brevity, this note omits any further reference to personal representatives except where such reliefs specifically do not apply or are not available to them.Rollover relief on replacement of business assetsRollover relief enables the gain arising on the disposal of certain types of business assets to be deferred if other qualifying assets are acquired within the period commencing one year before and ending three years after the date of the disposal. HMRC may extend these time limits in certain cases. Relief will be restricted if the asset disposed of has not been used for business purposes throughout the period of ownership.The relief must be claimed within four years of the end of the tax year in which the disposal of the assets, or acquisition of the new assets (whichever occurs later) takes place. A provisional claim can be made if there is a clear intention to obtain the relief, however if the tax deferred ultimately falls
Year end tax planning for individuals ― overview
Year end tax planning for individuals ― overviewTaxpayers may wish to consider basic tax planning arrangements in order to reduce the overall tax burden for them or their family.This is normally considered at the end of the tax year, either to reduce the liability for that tax year or to put arrangements in place that will reduce the liability in future tax years.Summary of guidance notes on personal tax year end planningThe guidance notes covering year end planning are split up by tax.For a checklist summarising year end planning for income tax, national insurance and capital gains tax, see the Checklist ― year end planning for income tax, national insurance contributions and capital gains tax for individuals.Income taxSummaryGuidance noteThis guidance note first examines the various income tax allowances and lower rate bands that should be considered and then the various strategies that might be appropriate, depending on the family circumstances. It also looks at the relevant anti-avoidance provisions and actions to consider before the end of the tax yearUtilising allowances and lower rate bandsTax efficient investments provide the investor with relief from one or more taxes for the current tax year, or are exempt from income tax and / or capital gains tax. Some investments have both attributes. This guidance note considers common tax efficient investments that might be appropriate, including the various individual savings accounts, venture capital schemes and pension contributions. It
Structures and buildings allowance
Structures and buildings allowanceWhat is structures and buildings allowance (SBA)?From 29 October 2018, expenditure on constructing a non-residential building or structure, or in certain cases, expenditure on acquiring such a building or structure, qualifies for an SBA. Except where the enhanced rate for freeport tax sites applies, SBA is given at an annual rate of 3% (from 1 April 2020 for corporation tax and 6 April 2020 for income tax, prior to April 2020 the rate was 2%), of the qualifying expenditure on a straight-line basis over 33 and 1/3 years, as a deduction in calculating the taxable profits of a trade or other qualifying activity. The 3% rate can be claimed on all expenditure, even where the building or structure was bought into use before April 2020. Where a chargeable period spans 1 April 2020 (corporation tax) or 6 April 2020 (income tax) the rate of 2% will apply for days before the relevant date and 3% for the days after that date. Any shortfall in allowances due to a business claiming 2% prior to April 2020 can be claimed in the last chargeable period in which an allowance is available, ie when the period of 33 and 1/3 years ends, but only if the business which held the building on 1 April 2020 (corporation tax) or 6 April 2020 (income tax) still holds the same interest in the building at the end of the 33 and 1/3 years.An enhanced rate of SBA applies to expenditure on buildings
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