New Changes Restrict Reliefs for Goodwill But Options Still Remain

Two changes were announced in the Autumn Statement to the treatment of goodwill on incorporation, which had immediate effect from 3 December 2014.

These were as follows:

  • Entrepreneurs’ Relief is no longer available on a sale of the goodwill to a connected party
  • Tax relief on writing off the goodwill (amortisation) can no longer be obtained once in the company.

Both of these changes will reduce the attractiveness of common planning which was undertaken when incorporating a business, but there are still options available to avoid tax becoming a drawback on incorporation.

The use of TCGA 1992, s.162 incorporation relief, in combination with s.165 gift relief where suitable, is still possible in order to avoid upfront capital gains on incorporation.

It should also be noted that the new restrictions only apply where the parties are connected, and there could therefore be situations where suitable planning could be undertaken to prevent the rules from applying.  Similarly, in cases of a management or third-party buy-out, these new restrictions should not apply.

With further tightening of the rules, it will be more important than ever to ensure suitable professional advice is sought before undertaking an incorporation as careful structuring will be needed to avoid unexpected outcomes.

Disincorporation Relief

Background

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)

Qualifying Transfer

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 peaves@eavesandco.co.uk.

A Property Business Can Qualify for Incorporation Relief

Ramsay v CRC – A Property Business Can Qualify for Incorporation Relief

Mrs Ramsay appealed against HMRC’s decision to deny her rollover relief under TCGA 1992 s.162 on the transfer of a property into a company – otherwise known as incorporation relief.

HMRC said the gain did not qualify for the relief as the property was not a business when the transfer was made.

The case was initially decided in favour of HMRC at the First-tier Tribunal.  However, the case was subsequently appealed to, and heard by the Upper-tier Tribunal.

Background & Relevant Facts

The taxpayer inherited a one-third share of a block of flats in 1987. She took over the administration for the whole building in 2002 and gifted half of her share to her husband in February the following year.

The couple spent about 20 hours a week attending to the building, making sure the rent was paid on time, cleaning communal areas, forwarding post to tenants who had left, and ensuring the property was insured and complied with fire regulations.

The taxpayer purchased the rest of the building from her brothers, and in September 2004, she and her husband transferred the property to TPQ Developments Ltd in exchange for shares in the company – incorporation relief was claimed. The couple made a gift in August 2005 of all their shares in TPQ to their son, who became the sole shareholder and director of the firm.

The Case

HMRC claimed the incorporation did not qualify for rollover relief under TCGA 1992, s 162 because the property was not a business when the transfer was made. The First-tier Tribunal (FTT) agreed the Revenue’s arguments.

The taxpayer appealed to the Upper-tier Tribunal (UTT).  The UTT found that the FTT’s finding was based on an error of law.

The question which was required to be addressed was a straightforward one; ‘whether the activities of Mrs Ramsay in relation to the Property constituted a business’.

Unfortunately, however, the FTT had concerned itself whether the property activities were sufficient to be taxed as trading income (rather than property income), and whether the property would have attracted business property relief.

The UTT said “business” in the context of s.162 should be interpreted broadly – there was no set test under the legislation.

The judge remarked that the criteria as to what constituted a business in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 were helpful, even though that case concerned VAT.

In this instance, the work carried out by the taxpayer satisfied the tests laid out in Lord Fisher. As to the question of degree, the taxpayer’s activities in respect of the property amounted to a business for the purpose of s.162.

The taxpayer’s appeal was allowed.