When the draft clauses for the Finance Bill were published, a week after the Autumn Statement, it became known that the Government had decided to remove one of the tax charges which may arise when a small company ceases trading and its business is taken over by one or more of the shareholders. The draft clauses show that the relief, which will apply from 1 April 2013, will take the form of ‘rolling over’ the notional but taxable gain that would otherwise on the transfer of the company’s goodwill and premises to the shareholders, so that no tax is payable by the company immediately, but more tax may be payable by the shareholder when they eventually dispose of the business (or the business premises).
To pause there for a moment, in reality the trading premises are often held outside the company, by the shareholders personally, by a family trust, or by the directors’ pension scheme. In such a case, no transfer of the premises will be required and so the new relief will apply only to the goodwill.
To continue, the relief will not be available unless the combined value of the goodwill and the premises (if currently owned by the company) does not exceed £100,000. Not only does this limit the relief to very small companies, it also means that the shareholder will have to value the goodwill (always a difficult task) before they know whether they are eligible for the relief.
Another problem is that, if the company has claimed Annual Investment Allowances on its machinery and vehicles, a substantial part of that tax relief may be clawed back at the time those assets are transferred to the shareholders. Other tax problems may arise and, all in all, the whole process is likely to be very complicated and the new relief will by no means be a magic bullet for solving the problems of disincorporating a business.
The shareholders themselves are also likely to suffer a tax charge, because if they do not pay full value for all the assets they take over (premises, goodwill, stock, equipment, vehicles etc), they will be deemed to have received a benefit from the company which in most circumstances will be taxable either as income or as a capital gain.
We can only conclude by saying that whether a disincorporation can be achieved at an acceptable tax cost will depend on all the circumstances of the individual case. If you have a company that you wish to wind up, we would be pleased to advise on the best method of disincorporation and on the likely tax and other costs of doing so.