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Unincorporating a business

Hi,

Looking for a bit of help.  I've dealt with plenty of incorporations but never an unincorporation.

Am I right in thinking that the rules regarding the transfer of stock and assets are pretty much the same for an unincorporation as they are for an incorporation?

i.e. Plant & Machinery at lower of actual consideration and original cost or joint election to transfer at TWDV.

Stock at market value or election for higher of acquisition cost or amount actually sold for.

The sole director/shareholder is owed quite a bit more than there is in the bank, so presumably some of his loan can be satisfied by transferring assets and stock to him?  This still won't cover the additional amount owing (I assume he can't "pay" more than the market value for either assets or stock") so could he be deemed to have paid for goodwill also (so he can then write it off in his sole trader accounts to reduce tax liability) or is that not allowed as they are connected?  Whether the goodwill actually has any value would be highly debatable as although the business is trading it doesn't actually make enough to even cover very basic expenses.

Would be grateful for any advice on this.

Many thanks

BG

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04th Aug 2010 14:07

Be careful. It's a minefield

There are no equivalent allowances or reliefs for un (or) disincorporation.

Company is deemed to be disposing of assets at their market value to a connected party. Assets includes any goodwill - this presumably exists as the business is to continue - otherwise why unincorporate rather than liquidate?  Goodwill disposal may give rise to chargeable gain unless base cost in the company is lower than current value.

Mark Lee

Tax Advice Network

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By zebaa
04th Aug 2010 21:25

Just wind the company up

Anything else must have a special reason.

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04th Aug 2010 22:03

Need to extract the stock and assets first.

Thanks for the replies.

Ultimately the plan is to wind up the company, but the company has quite a large bank account and a DLA owed to the director of more than the bank balance plus it has some stock and fixed assets, so my issue is really with getting this all out of the company prior to winding it up (we really don't want to donate it to the crown).

The shareholder/Director will then run pretty much the same business but as a sole trader (as a limited company is unneccessary and more expensive).

Getting the cash out is easy as it's all owed to the director.  The excess of DLA over bank balance actually also means that the Director can in effect pay market value for the stock and fixed assets and offset against the DLA owed to him.  However, this still leaves a few thousand owed to him.  Obviously we'd rather not just write this off and I'm wondering if there's some way that we could pay the company (e.g. for goodwill) so that we can write it down in future against any sole trader profits.

The funds owed are a loan not shareholding so I don't think there's any way that we can use it against net income as a loss.

The company has losses b/fwd of more than the additional amount owing so could use those to offset any gain on goodwill etc.

Would it be acceptable for my client to make a payment for the goodwill of the business equal to the additional amount owing to him and then write this down against his trading income a period of years?   

Thanks again

BG

 

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05th Aug 2010 10:55

Capital losses?

You can't set trading losses b/fwd against CG.

If you have trading losses you could transfer stock and plant at MV and debit to DLA.  You can transfer stock at cost and make a s266 election for CAs but if there are losses you could use against trading profits and balancing adjustments.

If assets are introduced to the sole trader business at MV then the value will create a positive capital account which could help finance drawings without affecting the tax liability as that is of course just based on the sole trader's profit.

If you do have some capital losses and can use against the value of goodwill then that seems a good idea.  The goodwill could be personal of course in which case the company doesn't own anyway, but so long as you don't over-egg it a reasonable amount may not be challenged.  Even if it is then if the DLA is still in credit after debiting the value of goodwill then there is some leeway there.  If there is an unrecoverable balance on DLA then a claim under s253 TCGA could be in point - though there is a question mark there since it could be argued that the DLA is only irrecoverable as a result of the director's actions in disincorporating.

kmtaxconsultant.co.uk

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07th Aug 2010 12:36

Thank You

Many thanks to you all for your help on this.

I have now managed (with your help) to work it all out so we can extract funds, stock, assets etc and clear the DLA.

Always a comfort to know that there are experienced and helpful people on this site who are willing to help out when they can.

 

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