Frequently Asked Business Question:
Back in the early noughties, I changed my small plumbing business from operating as a sole-trader to operating as a limited company. I find the requirements of operating as a company onerous and I would prefer to be a sole-trader again. Can I use disincorporation relief to do this?
Disincorporation relief was introduced on 1 April 2013 to help small companies, which no longer wanted to be companies, to transfer their trade and assets to shareholder directors and back to a partnership/sole-trader status with minimum fuss. The relief is subject to a sunset clause: the relief is unavailable for business transfers on or after 1 April 2018 so businesses need to act now if they want to use this relief.
If we remember back, the 2002 Budget introduced a 0% corporation tax band and there was a surge in incorporations – the archetypal small limited company ‘sole-trader’ plumber/ builder etc. However, with changes in corporation tax rates and dividend tax rates, the small company business model has become less attractive. But disincorporation can result in significant tax liabilities if not done properly. Disincorporation relief enables the shareholders of small companies to take over the assets of the company and carry on the trade as an unincorporated business, without the company suffering capital gains tax on the market-value deemed disposal of the company assets.
A key problem with disincorporation relief is that it only applies with regard to gains on land and buildings and goodwill realised by the company; there is no relief from tax for the shareholder(s) in respect of the distribution received from the company. This is likely to be the main reason why take-up of the relief has been so poor. Also, it is possible that the cap of £100,000 is too low given the value of land in the UK.
As it stands, disincorporation relief will not be available for business transfers taking place on or after 1 April next year. The Government could choose not to act and so to let the relief fall away; or it could extend the sunset clause, giving the relief a temporary reprieve.
For certain businesses, there will be a point where the business is best carried on through a limited company and a point where the sole trader or partnership model would be a better fit. For the business to do as well as it can, it is important that the business owner is able to choose the most appropriate structure at that time, and that tax is not a barrier to changing the structure of the business. Let’s hope that disincorporation relief continues to be available after 31 March next year, and that the Government takes this opportunity to make the relief more attractive to small business owners.
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.