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Article contributed by ACCA

New relief will tackle the most significant tax barrier on disincorporation.

Disincorporation relief is the relief available for businesses who wish to change their legal form from a limited company to self-employed. The changes introduced by the Finance Bill allow eligible businesses greater flexibility to choose the most appropriate legal structure in which to operate.

Relief design

The provisions of the proposed disincorporation relief are designed to relieve the company from tax charges when assets are transferred to the shareholders and also to relieve the shareholders from tax due when they receive those assets from the company.

Disincorporation relief provisions

The provisions are:

  • the company will not have to pay corporation tax on gains or profits on qualifying assets. Instead, the assets transferred will be treated as transferred for an amount that ensures there is no corporation tax to pay
  • shareholders will not incur additional tax charges on the distribution of assets; the shareholder charge will be covered by a roll-over relief to ensure tax is paid when the asset or the unincorporated business is finally disposed of.

Qualifying conditions

These are:

  • the business is transferred as a going concern
  • the business is transferred together with all of the assets of the business, or together with all of those assets other than cash
  • total market value of the qualifying assets of the business included in the transfer does not exceed £100,000
  • all the shareholders to whom the business is transferred are individuals
  • each of those shareholders held shares in the company throughout the period of 12 months ending on the business transfer date
  • the relief will run for five years from April 2013
  • qualifying assets are limited to goodwill or an interest in land which is not held as trading stock. Plant and machinery are excluded from the definition of qualifying assets.

The claim should be made jointly by the company and all of the shareholders to whom the business is transferred and is irrevocable.

Conclusion

The government believes the relief will tackle the most significant tax barrier on disincorporation and it is straightforward to deliver. The limit of £100,000 on the qualifying assets would mean that the relief will be available to the majority of those businesses which might want to disincorporate.