Company owners may be reviewing their business structure following the unexpected changes announced to dividend tax rules in the Summer budget, where an increased tax charge on dividends was declared, effective from April 2016. In instances where the benefit of operating through a company is now marginal, owners may consider disincorporation or winding up their company and it may be appropriate to consider the availability of Disincorporation Relief.
This relief was introduced in 2013 and can apply to disincorporations, meeting the qualifying conditions, which are undertaken between 1 April 2013 and 31 March 2018.
The relief allows a company to transfer certain types of assets such as land and property and goodwill to its shareholders (who continue to operate the business in an unincorporated form) without the company incurring a Corporation Tax charge on the disposal of assets.
Usually transfers between a company and its shareholders are treated as taking place at market value for tax purposes regardless of the amount actually paid. However a joint claim to Disincorporation Relief by the company and its shareholders allows qualifying assets to be transferred at a reduced value so that no Corporation Tax charge arises to the company. The shareholders accept the reduced transfer value of the assets for all future capital gains computations and claims must be made to HM Revenue & Customs (HMRC) within two years of the date of the transfer (but can’t be made if the company has already been struck off or wound up).
To qualify the transfer must meet certain conditions including the requirement that the business must be transferred as a going concern, all assets other than cash must be transferred, the market value of assets included in the transfer must not exceed £100,000 and the transfer must be made to shareholders who are individuals and have held their shares in the company for 12 months prior to the transfer. The business can be transferred to individuals who are in partnership but not to members of a limited liability partnership.
It is important to note that no relief is available for the tax charges which may arise on shareholders when assets are transferred to them in the course of a disincorporation and they may still be liable to tax. If assets are transferred at below market value this may be treated as a dividend in specie and be subject to tax. Shareholders may also be liable to Capital Gains Tax if they dispose of the assets at a future date.
Whilst the announced changes to the dividend tax rules do not come into effect until April 2016 and legislation will not become final until the Finance Act in 2016, we recommend that business owners start to consider their own situation sooner rather than later. If disincorporation is a consideration it is likely to be advantageous to complete this before the changes come into effect as the tax treatment of the transfer of assets to shareholders may be less favourable following these.
Should you require further assistance with this or any other tax matter, Mairi Drummond of Rennie Welch LLP can be contacted on (01573) 224391 or mairi.drummond@renniewelch.co.uk.
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