Changes to the taxation of dividends have reduced the tax advantages associated with operating as a company. Add into the mix the additional burdens imposed on companies – such as the need to file accounts and an annual confirmation statement at Companies House – and it is easy to see why the question of whether it would now be better to operate as an unincorporated business may arise. However, while it is relatively easy to incorporate a business and reliefs are available to smooth the way, going from a company to an unincorporated business is less straightforward, and may trigger unwanted tax charges.
Enter disincorporation relief
Disincorporation relief allows a company to transfer certain types of assets to its shareholders who continue to operate the business in an unincorporated form, without the company incurring a corporation tax charge on the disposal of the assets.
Without the benefit of the relief, transferring assets to shareholders may trigger a corporation tax charge. A transfer between a company and its shareholders is one between connected persons, and as such, the transfer is deemed to be at market value, regardless of the actual money, if any, which changes hands. If the market value is more than the original cost or tax written down value, this will trigger a corporation tax charge.
Disincorporation relief essentially delays the charge and passes it to the shareholders, who agree to use the transfer value as the cost of working out any gain on a subsequent disposal of the asset.
Disincorporation relief is only available where:
- the company transfers its business to some or all of its shareholders;
- the transfer is a `qualifying transfer’; and
- the transfer date is on or after 1 April 2013 and on or before 31 March 2018.
The business must be transferred to individuals or to individuals who are in partnership (but not to a limited liability partnership), and they must continue to run the business afterward. The relief must be claimed jointly by the company and its shareholders.
The relief is only available for a qualifying transfer. This is a transfer where all the following conditions are met:
- the business is transferred as a going concern;
- the business is transferred together with all the assets of the business, or together with all the assets of the business apart from cash;
- the total market value of the business at the time of the transfer is £100,000 or less;
- the shareholders to whom the business is transferred are individuals (including individuals in partnership); and
- the shareholders holding shares in the company throughout the 12 months before the transfer.
Qualifying assets are an interest in land (other than land held as trading stock) and goodwill (though an adjustment may apply if the goodwill relates to a business started on or after 1 April 2002 or acquired from an unrelated third party on or after that date).
At its introduction, disincorporation relief only applied to transfers occurring within a five-year window – 1 April 2013 to 31 March 2018. It was announced at the time of the Autumn 2017 Budget that the end-date will not be extended, and as such disincorporation relief will not be available for transfers after 31 March 2013. The transfer date is normally the date that the business is transferred but may be a different date for a disposal under contract.
Where the intention is to disincorporate, the clock is running on the availability of disincorporation relief.