Incorporating a business is where your trade is transferred to a company. This means there are changes in tax obligations when running and changing your business over from either a sole trade or partnership to a limited company.
When incorporating a business, the trade and assets must be transferred at open market value to a company controlled by the seller. Included in the assets may be some ‘goodwill’ – this is a value covering the business’ reputation or customer relationships, as well as the value of continuing contracts.
Transferring the assets may create a capital gain which is taxable for the seller, as the assets’ value will increase during the time they were used or created.
Capital gains tax will arise on the gains, but there are various reliefs that can be used to postpone or reduce the tax payable. One of these is entrepreneurs’ relief, which can reduce the tax payable to just 10%.
Entrepreneurs’ relief no longer applies to gains arising on the transfer of goodwill as part of an incorporation on or after 3 December 2014. It’s still available to reduce tax from gains arising on other transferred assets, but not from the goodwill.
If you’re thinking of incorporating your business, you’ll need to consider which assets you’d like to transfer to the company, and which you’d rather leave in your own name. Transferring land and buildings often carries an additional cost in stamp duty land tax.
Planning the transaction well in advance is the best way to reduce any tax payable, so please do get in touch with us on 01782 279615 to discuss incorporation and the tax implications.