Capital assets on incorporation of your business
For a general overview of incorporation or transferring a business to a Company then please see here.
Introduction – capital assets on incorporation of your business
This article deals with the treatment of capital assets when transferring a business to a Company.
It should be read in conjunction with our other notes on transferring a business to a company and incorporation.
Where a Company has goodwill, it will generally be transferred to the Company on incorporation. As such, it will be necessary to value it prior to the transfer.
It should be noted that the Company may have goodwill even where it has not previously been recognised on their balance sheet. In addition, some businesses will not be able to separately identify (or value) its goodwill
Where the business is closely linked to a property – typical examples being a hotel, care home or day nursery – then the goodwill may be considered as inherent to the building. This means it cannot be separated from the property.
Where the business is highly linked to the expertise of an individual – such as a personal service company or an actor / musician – then any goodwill is likely to be attached to the person rather than the business.
There will be a disposal at market value transaction for the purposes of CGT. However, any resulting gain might be heldover:
- Under TCGA 1992, s162which is often referred to as incorporation relief and applies on the transfer of any business. However, it requires the transfer of the whole business (excluding cash and some debts by concession); or
- Under TCGA 1992, s165 which is often referred to as holdover relief where there is a trading business
With effect from 3 December 2014, it has no longer been possible for Entrepreneurs’ Relief (“ER”) to be claimed in respect of goodwill. Further, the company is unable to claim tax relief on the amortisation of the goodwill.
Transferring land & property
If you transfer the property used in the business to the company then it will have the following consequences:
- The transfer will be a market value transaction for CGT purposes:
However, as noted above, this gain may be covered by either incorporation relief or holdover relief subject to satisfying the relevant conditions.
- It will take place at a market value consideration for Stamp Duty Land tax (SDLT) purposes.
As such, it does not matter whether or not there is any, or the amount, of actual consideration any consideration is received or not.
One exception to this is where the business being transferred is operated through a partnership or LLP. In these circumstances, special computational rules apply.
Some will decide to keep the property in their own name rather than transfer it to the Company. In these circumstances, it is common to let the property to the company.
It should be noted that this rent will be taxable at personal tax rates which might exceed the deduction for rental payments in the Company which may only be offset against corporation tax.
Further, Entrepreneurs’ Relief is not likely to be available on a future disposal of the property if rent is charged on the property.
You will only receive IHT BPR at 50% of the property value on death. If the property was held by the company BPR could be at 100%.
Fixtures & fittings
If the property includes any inherent fixtures and fittings that might potentially qualify for capital allowances then these should be identified, valued and added to the relevant pool before they are transferred to the company.
Land & property held as an investment
Such a transfer will be a market value transaction for CGT. Even though this investment property is not a trade, it may be sufficient to qualify as a business and, if so, TCGA 1992, s162 incorporation relief is in point.
The rate of CGT remains 28% where the property is UK residential property.
Unless the properties are being transferred from a partnership or LLP, then this will be deemed to take place at market value for Stamp Duty Land tax (SDLT) purposes.
If the property is residential then:
- It is likely that the additional 3% rate will apply to the transaction;
- If there are multiple properties then Multiple Dwellings Relief may be in point;
- Where there are 6 or more properties then one can choose to apply the non-residential rates; and
- If the properties are let to unconnected third parties on market terms (or the property is less than £500k in value) then the 15% super rate for corporate acquisitions is not in point.
- The Annual Tax on Enveloped Dwellings (“ATED”)should not apply where the property is let to unconnected third parties on market terms (or the property is less than £500k in value)
Plant & machinery (P&M)
Generally speaking, there are no CGT implications assuming that the assets have not gone up in value.
Instead, profits and losses are dealt with through capital allowances,
P&M can be sold to the company for anything up to the market value. However, there will be a balancing charge / allowance as a result.
P&M that is transferred to the company for nil consideration are treated as being transferred at market value.
The transferor and the company can jointly elect to treat the assets as though they were transferred at Tax Written Down Value (TWDV) for tax purposes.
Remember that Capital allowances can’t be claimed in the final accounting period. That said, transferring assets for £1 would effectively produce a similar result to the Annual Investment Allowance.
Stock & Work in Progress (“WIP”)
It is usual for these to be transferred to the Company so that it can continue to operate the trade. They are deemed to be transferred to the company at market value. Of course, this will generate a trading profit or loss for the original business.
Where sold at a mutually agreed discount then they can jointly elect to treat them as being sold at the higher of:
- Cost; and
- The agreed price
Where these are left behind then the proprietor is deemed to procured these for his or her own use.
Debtors & Creditors
Debtor balances that are transferred to the company will do so at the book value. If the proprietor continues to receive payments then this will have to be adjusted through their loan account.
In circumstances where debtors are not transferred then the proprietor’s capital account is usually adjusted to reflect this and they will get to keep the receipts as they arise.
If creditors are not transferred then it will be the sole trader’s responsibility to settle these personally.
Cash at bank
In most cases, cash is not transferred to the Company. Where the Company does need cash then it is efficient for the proprietor to lend this cash to the business as he or she can draw down on this loan tax paid.
For VAT issues on the transfer of a business to a Company then please see here.
If you have any queries relating the transfer of capital assets on incorporation of your business or incorporation generally then please get in touch.