Disincorporation Relief Uncovered
Disincorporation relief provides shelter, but only from corporation tax, for goodwill and land and buildings leaving a company. The assets must leave as part of the transfer of a whole business as a going concern via a distribution to non-corporate shareholders.
It is important to note that there are potential income tax or capital gains tax charges on the shareholders on the distribution of the business, which needs to be managed.
When Might Disincorporation Relief be of Use?
– If the shareholders wish to separate trades to plan for a potential sale of one. One business could be left in the company and one distributed out
– To assist in the facilitation of a demerger of two or more businesses to allocate them in whole to shareholders
– To facilitate the withdrawal of a property business from an otherwise trading company, in order to assist with its qualification for Entrepreneurs Relief
When will Disincorporation Relief Not be Appropriate
If the shareholders wish to withdraw land and buildings from a company when it no longer has a business (say through a member’s voluntary liquidation or strike off)
– If the trade is of a reasonable size. This is because the relief only applies if the goodwill, together with any land or buildings associated with the business is worth less than £100,000.
It is of importance to note that making a claim for disincorporation relief means that the asset is distributed for corporation tax purposes at the value that the company paid for it.
This value is also then taken to be the capital gains tax base cost of the individual acquiring it. This could influence whether a claim for disincorporation relief is made or not.
The value of the distribution subject to capital gains tax or income tax by the shareholders is not affected by whether a claim for disincorporation relief is made.