In the not-too-distant past, incorporation was synonymous with automatic tax savings. However, successive governments have eroded these tax benefits. With additional administration and costs, many directors are considering disincorporation. As ever, there are tax implications for both the company and individual.
Asset transfer
Whatever the reason for disincorporation, when a company with assets closes, HMRC generally treats the company as disposing of those assets to the directors at market value. For the company, this would usually crystallise either balancing charges or allowances. However, where there is a business succession between connected parties, a balancing charge or allowance can be avoided by making an election. The effect is for any actual or deemed disposal proceeds to be ignored and for the capital allowance pool to be transferred at its tax written-down value.
A valid election must be made jointly by the company and individual within two years of the date of succession. The succeeding business then includes the transferred closing written-down value as an addition in its opening capital allowance pool. No writing down allowances are given on the purchase of plant or machinery in the company’s final basis period, and a balancing adjustment is calculated.
Transferring stock
Similar to the transfer of assets, the transfer of stock is deemed to be at ‘market value’. However, it should be possible for the parties to make a joint election to transfer the stock at its actual transfer value (or, if higher, the book value).
Capital assets
A company that has been in business for a while may have built up a significant value of ‘goodwill’ when they decide to disincorporate. Goodwill is an asset that will be transferred to the new business along with any other ‘relevant’ assets (e.g. land and buildings). HMRC usually taxes such a transfer as a chargeable gain, again at market value as the transfer will take place between ‘connected parties’. However, unlike for assets subject to capital allowances, there are no reliefs available to defer or hold over any gains. As such, this tax charge is often the largest hidden tax cost in disincorporation.
Stamp duty land tax (SDLT)
If a property used by a company is transferred to someone connected to the company (e.g. a shareholder who becomes a sole trader), HMRC treats the transaction as if the individual bought at market value, even if no money changes hands. However, if a property is transferred as a distribution in specie (non-cash), this should be exempt from SDLT. This is provided that the property is not encumbered with a loan and the distribution does not give rise to the creation of a debt.
Where there is a third-party (non-shareholder) loan secured on the property, the transfer will attract SDLT where there is an assumption by the shareholder of liability for the debt.
VAT (Value Added Tax)
As a general rule, when a trade ceases the VAT-registered entity is deemed to make a taxable supply of all goods held by the business. However, on a transfer from a company to sole trader, there should be no VAT charged by virtue of the ‘transfer of going concern’ provisions.
Withdrawing monies
There will be the usual considerations (i.e. tax rates and timing, etc.) when deciding how to withdraw any remaining cash from a solvent company, but the outcome will probably be a straight choice between taking a dividend or a capital distribution.
A capital distribution (only available on the company’s closure if the total amount paid to all shareholders is less than £25,000), will be subject to CGT taxed at either 18% or 24% for 2025/26, depending on the level of the shareholder’s income. Where the distributable amount exceeds £25,000, the shareholders pay income tax at the dividend tax rates, after taking into account the £500 dividend allowance (and any personal allowance, if available).
Practical point
Disincorporation can be a significant step, so it is advisable to consult professionals to ensure compliance and understanding of the implications.
