Thinking of incorporating your business but worried about the tax consequences? 2 of the main taxes to consider as part of incorporation are:
· Capital gains tax on any gains made at transfer
· Stamp duty land tax (SDLT) in relation to the business premises
Capital gains tax and Incorporation relief
As a trading business, it should be possible to defer any capital gains tax (CGT) using incorporation relief. This relief only applies however, where all of the trade and business assets (other than cash) are transferred to a company in exchange for shares. Any capital gain made at incorporation reduces the base cost of those shares by an equal amount, and thus defers the gain until the shares are sold.
SDLT
One aspect of incorporation which is often overlooked is SDLT, and this isn’t covered by incorporation relief. SDLT becomes an issue when you are considering transferring land and / or buildings into the company.
The default position on transfer is that it will be treated as a chargeable transfer for SDLT because the “seller” and the “purchaser” are connected – as such market value rules are applied and SDLT can be as high as 5% on transfers with a market value over £250,000.
In what circumstances is SDLT avoided?
In a nutshell, where the business being incorporated is a partnership, the general market value rule above is overruled. Any actual consideration given is ignored, and instead a complicated formula to determine what percentage of the market value is chargeable to SDLT must be calculated. The crux of this formula is to identify how much of the market value of transfer is subject to SDLT, based on ownership of the asset pre and post transfer. And if no chargeable consideration is identified, then nothing needs reporting to HMRC.
If you would like to discuss this, or any other matter regarding incorporation, then please don’t hesitate to call Jamie or Jane on 01759 305 989