Disincorporation Relief was introduced from 1 April 2013 and is a form of roll-over or deferral relief.
When a company ‘disincorporates’ there is a transfer of assets between the company and its shareholders. As the parties are connected, the transfer is deemed to occur at market value for tax purposes and normally results in a Capital Gain. Prior to the introduction of disincorporation relief this would result in a Corporation Tax charge being incurred.
Disincorporation relief enables small owner-managed companies to transfer qualifying assets so that no capital gain arises, and as a result no Corporation Tax charge is incurred.
The availability of Disincorporation Relief coincides with the introduction of other tax simplification measures for unincorporated businesses, such as the ‘Cash basis’ election and the flat rate expense allowances.
Conditions for Relief
A company and its shareholders can make a claim for Disincorporation Relief if:
the company transfers its business to some or all of its shareholders
the transfer is a ‘qualifying transfer’
the transfer occurs between 1 April 2013 and 31 March 2018
the transfer is to either a sole trader or individuals in partnership, but not to members of a limited liability partnership (LLP)
There are a number of conditions to be met, and each case should be considered in the light of the facts. One of the key requirements, which will restrict the application of the relief, is that the total market value of ‘qualifying assets’ (land and goodwill) at the time of the transfer must be below £100,000.
If you would like more information on Disincorporation Relief please contact Paul Eaves on 0113 244 3502 or firstname.lastname@example.org.
How many clients have a ‘cunning plan’ where they overdraw their private company loan account and then ‘rectify’ the position with a bonus/dividend just before 9 months have passed so as to avoid a charge for loans to participators under S455 CTA 2010? How many then repeat the pattern year on year?
How many partnerships have converted to LLPs, have ‘salaried partners’, saving employer/Class 1 NIC?
How many structures have corporate partners included?
Each of these types of arrangements may be affected by proposals in the Finance Bill 2013 and the outcome of a current Government consultancy process (scheduled to close 9 August 2013) where new legislation is proposed for April 2014. As the proposals affect the fundamentals of business planning, then serious strategic thought should be given on the potential impact straight away.
The rules are quite complex (and therefore at odds with supposed ‘tax simplification’) and may well result in an unexpected hit where businesses will find well established arrangements are suddenly taxed differently.
In particular, new provisions on the S455 charge are being brought in, which seek to deny the relief due on a ‘repayment’ of a loan where there are arrangements in place to advance a replacement loan.
Changes are also planned for partnerships where a salaried partner carries little or no equity risk whereby in future they are likely to be liable under PAYE with consequent impact on cash flow, expense deductibility, car arrangements and employers national insurance contributions.
One of the problems with Entrepreneurs’ relief as opposed to the old rules on Business Asset Taper Relief, was that employee shareholders could struggle to acheive the relief due to the 5% holding requirement. This position has now been relaxed where shares are acquired through an Enterprise Management Incentives scheme, meaning it should now be easier to obtain Entrepreneurs’ relief on Enterprise Management Incentives (EMI) share options.
Draft proposals under the Finance Bill 2013 will remove the requirement for a person to hold at least 5% of the ordinary share capital of a company in order to qualify for entrepreneurs’ relief on shares acquired through a qualifying EMI share option scheme.
The legislation will also be changed to allow the period in which the options are held to count towards the 12 month holding period required to qualify for entrepreneurs’ relief.
These announcements will therefore increase the already highly efficient tax treatment of EMI schemes, and potentially enhance the incentivisation of employees under such schemes. Even where the share option scheme itself is not desired, EMI schemes could potentially be used to enable employees to acquire shares that will qualify for Entrepreneurs’ relief, as there is no minimum exercise period for EMI options.
Under current legislation a corporate tax deduction is given on shares acquired through employee shares schemes. The amount of the deduction available is the amount that is chargeable to income tax when the shares are acquired by the employee or the amount that would be chargeable if the employee was a UK resident and other reliefs were unavailable.
The legislation introduced under Finance Bill 2013 clarifies that if relief is given under Part 12 CTA 2009 it is not possible to claim any other deduction for Corporation Tax in relation to those employee shares or options.
The legislation also highlights that no Corporation Tax deductions are available to a company in relation to employee share options unless shares are actually acquired by an employee in accordance with the option.
It appears these provisions are largely to prevent avoidance and should not affect genuine planning using tax efficient options such as EMI schemes.
With all the fanfare of the increase in personal allowance to £10,000 ahead of schedule, the accelerated alignment of Corporation Tax rates and the £2,000 NICs break for small employers you may have missed some of these other important taxation announcements in the 2013 Budget:
New Close Company Loan Rules – Overdrawn Directors Loan Accounts (s.455 Tax)
Inheritance Tax Exempt Amount to Non UK Domiciled Spouses
Above the Line R&D Tax Credit
Increase in the Lifetime Inheritance Tax Exempt Amount to Non UK Domiciled Spouses
The lifetime Inheritance Tax exempt amount for transfers between UK-domiciled individuals and their non UK domiciled spouse or civil partner is to be increased from £55,000 to £325,000 (i.e. in line with the nil rate band).
The exempt limit will then mirror the nil rate band as it increases.
UK Domicile Election
In addition there will be a new election regime, whereby non-UK domiciled individuals who are married or in a civil partnership with a UK domiciled person will be able to elect to be treated as UK-domiciled for Inheritance tax purposes.
The non UK domiciled spouse who makes an election will benefit from uncapped Inheritance tax exempt transfers from their spouse or civil partner, but subsequent disposals by them would be liable to IHT (subject to their own nil-rate band), irrespective of the location of the assets.
If no election is made then the non UK domiciled spouse’s overseas assets would be exempt from Inheritance tax but any transfers from their UK domiciled spouse or civil partner would be subject to the lifetime exempt limit above.
Budget 2013 announced the introduction of a 10% ‘Above the Line’ credit for large company R&D activity.
The ‘Above the Line’ credit is designed to increase the visibility of large company R&D relief and provide greater cash-flow support to companies with no corporation tax liability.
Companies will be able to claim the ‘Above the Line’ tax credit for their qualifying expenditure incurred on or after 1 April 2013. The credit will be equal to 10% of the qualifying R&D expenditure. The credit will be fully payable, net of tax, to companies and will not be liable to Corporation Tax.
The ‘Above the Line’ credit scheme will initially be optional and companies will be required to elect to claim R&D relief under this scheme.
Companies that do not elect to claim the ‘Above the Line’ credit will be able to continue claiming R&D relief under the current large company scheme until 31 March 2016.
The ‘Above the Line’ credit will become mandatory from 1 April 2016.
Budget 2013 announced various anti avoidance measures aimed at the loan to participators/overdrawn directors accounts s.455 tax charge .
Repayment Provisions Amended To Deny “Bed & Breakfasting”
Certain owner managed companies have previously been extracting funds from the company through overdrawn directors loan accounts, which are then repaid by crediting the loan account just before the date when tax would become due under s.455. They would then subsequently recreate a similar debt to the company. Such tactics are now being targeted by HMRC as previously there were no specific rules to prevent it.
The repayment provisions are to be amended so as to deny relief for the loan to participators s.455 tax charge where repayments and re-drawings are made within a short period of time of each other, or there are arrangements (or an intention) to make further chargeable payments at the time repayment is made (and there are subsequent re-drawings).
The effect of this being that the loan to participators s.455 tax charge can no longer be avoided by repaying the loan within 9 months of the accounting period end if a loan is taken out again soon after or there is an intention to do so. Therefore such ‘bed and breakfasting’ is no longer a possibility.
Loans via Relevant Partnerships & LLPs
Legislation will be introduced in Finance Bill 2013 to apply the loan to participators s.455 tax charge to any loans from close companies to participators made via partnerships (including LLPs) in which the close company and at least one partner/member is a participator (or associate of).
Extractions of Value
Where there is an extraction of value from a close company and the value is transferred to a participator, there will be a 25% tax charge on the close company on the amount of the payment to the participator.