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Disincorporation Relief is available to small businesses looking to convert from being a corporation subject to the regulations of the Companies Acts to the flexibility of being unincorporated.

Disincorporation relief is available to small businesses looking to convert from being a corporation subject (as determined by the regulations of the Companies Acts) to the flexibility of being unincorporated. It is also suitable for a small company within a group looking to escape tax relief restrictions imposed by the associated companies’ regime.

Where a company transfers its business to some or all of its shareholders and the transfer of the business is a qualifying business transfer, a claim for disincorporation relief may be made. The transfer must be made within five years from 1 April 2013 for this legislation to apply.

Qualifying business transfer

The conditions necessary for the transfer to qualify are:

  • the business is transferred as a going concern
  • the business is transferred together with all the assets of the business, or all the assets other than cash
  • the total open 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 these shareholders held shares in the company throughout the period of 12 months ending with the business transfer date.

(*Market value means the price which an asset might reasonably be expected to fetch on a sale in the open market.)

A ‘qualifying asset’ means:

(a)   goodwill, or

(b)   an interest in land which is not held as trading stock.

An individual includes a member of a partnership, but does not include an individual acting as a member of a limited liability partnership.

Sections 58 to 61 Finance Act 2013 are effectively a mirror image of section 162 and 162A Taxation of Chargeable Gains Act 1992 (incorporation relief).  Section 61 inserts new sections 162B and 162C into that Act. These deal with the situations where goodwill was recognised pre-Finance Act 2002 and post-Finance Act 2002 respectively. 

Making a claim

A claim for disincorporation relief must be made jointly by the company and all the shareholders to whom the business is transferred. It is irrevocable and must be made within two years of the business transfer date. 

Assets include pre-Finance Act 2002 goodwill

Where a company disposes of qualifying assets to shareholders on disincorporation and the assets were acquired prior to 1 April 2002, the disposal and acquisition will be treated as made for the lower of:

  • the amount allowable as a deduction in computing a gain
  • the market value of the asset.

This provision does not apply to goodwill acquired as post-Finance Act 2002 goodwill.

Assets include post-Finance Act 2002 goodwill

If the goodwill value has been written down for tax purposes, the transfer is to be treated as being the lower of:

  • the tax written down value, and
  • the market value.

If the goodwill value has not been written down for tax purposes, the transfer is to be treated as the lower of:

  • the cost of the goodwill, and
  • its market value.

If neither applies, the transfer value of the goodwill is nil.

Remember, the disincorporation legislation takes effect in relation to business transfers from 1 April 2013.

Article contributed by ACCA