A report by the Office of Tax Simplification found that ‘a small but significant number’ of limited companies would prefer to operate a sole trader or partnership model but were deterred from doing so by corporation tax that would be triggered by the transfer of certain company assets to shareholders who continue the business in an incorporated form. In response the government introduced a temporary tax relief for eligible businesses that disincorporate, called Disincorporation Relief.
Disincorporation is the transfer of a business and its assets from a limited company to its shareholders who continue the business in unincorporated form as a sole trader or a partnership (not an LLP).
Businesses that qualify for disincorporation relief will not be charged corporation tax on any chargeable gains from the disposal of certain business assets (including goodwill, land and buildings used for the business).
To qualify for the disincorporation relief a business and its shareholders need to satisfy the following criteria set by HMRC:
- total value of qualifying assets doesn’t exceed £100,000
- the business is transferred as a going concern
- the transfer includes all assets of the business (cash can be excluded)
- recipient shareholders are individuals, partnerships are not LLPs, and shareholders have held their shares for at least a year prior to the transfer date
- the disincorporation takes place between 1 April 2013 and 31 March 2018
- a claim for disincorporation relief is made within 2 years of the date of the transfer
The attraction for many in running an incorporated business is lighter regulation; an unincorporated business is not required to file accounts and Annual Returns at Companies House. There are disadvantages to this model: unincorporated businesses are unable to pay dividends (as such recipients can’t benefit from the lower tax rate dividend payments are subject to) and there is no limit on the liability, e.g. if the company fails, your private property (houses, cars etc.) could be claimed by creditors.
If disincorporation is suitable for your business then you should consider London Registrars’ disincorporation service. Our experienced team will make the process straight-forward and ensure that your disincorporation qualifies for the tax relief. Our company secretarial services would reduce the time spent complying with company law if you decide that a limited company is the best solution for your business.