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Contributed by ACCA

The government has decided to introduce a relief which will be available for businesses to change legal form from a limited company to self employed, referred to as ‘disincorporation relief’.

The design and conditions that apply have been incorporated in the Finance Bill 2013 and will have effect for disincorporations on and after 1 April 2013 and until 31 March 2018.

Relief design

The relief is designed to remove the capital tax charge on disincorporation. 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.

The relief aims to ensure that:

  • 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
  • qualifying assets are limited to goodwill and land and buildings used in the business, plant and machinery are excluded from the definition of qualifying assets
  • shareholders will not incur additional tax charges on the distribution of assets. This will be covered by a roll-over relief to ensure tax is paid when the assets or the unincorporated business are finally disposed of.

The proposed provisions are that:

  • the company transfers its business to some or all of its shareholders
  • the business is transferred under a contract
  • the business must be 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
  • the total market value of the qualifying assets of the business included in the transfer does not exceed £100,000
  • all of 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.

Estimated impact

The government believes a relief covering the company corporation tax charges 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 approximately 40% of UK companies will be eligible for this relief, covering the majority of those businesses which might want to disincorporate.

You can view the clauses on disincorporation together with the explanatory note on pages 539 to 549 of the Finance Bill 2013.