Another Incorporation Query

Another Incorporation Query

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Hi

I've just met with a potential new client who has profits in the region of £140K, shared 50/50 with his wife.  We talked briefly about the pros and cons of incorporating to an ltd and he seemed quite interested in looking into this options in the future.  Whilst I'm happy with acting for the ltd, I'm afraid my knowledge falls down a bit on the actualy incorporation of the business side of things and I was hoping for some advice.  Details are as follows:

Property     185,000

Equipment  112,000

Vehicles      14,000

Debtors       95,000

Cash            1,500

Creditors      5,000

VAT            21,000

Loans       214,500 (Including a loan on business premises)

Under S162 I must bring over all assets of the business, so the property, equipment and vehicles, what about the debtors?  Also, what about the related loan on the property?  How is this accounted for?  Is it wise to bring in a property into a company given the potential for "double tax" on the eventual sale of the company (the client has indicated this is something he is interested in the in the 5-10 years)

If the property is left out of the company, then we can use S165 to hold over the gain instead on the goodwill ( as he is a potential I not looked into goodwill valuations yet, I just want to get my thinking straight first) but lets say is £25k.

Also can you confirm what my double entry journals would be under both scenarios, if say we set the company up with 100 shares issued equally between husband and wife.

I realise this is something I should be up to date on but its been such a long time I just want to ensure my thinking is correct.

Thanks

Replies (5)

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By BMary83
27th Mar 2012 11:10

PS

I'm beginning to think S165 is the way to go having read this:

 

TCGA 1992 s 165 relieves gifts of business assets to the company. The gain arising on each asset is deducted from the base cost of that asset in the company, and deferred until the company sells the asset. Consideration for the assets may be cash or credit to the director's loan account. s165 allows retention of assets outside the company. This avoids SDLT on premises, and double-CGT-charges on appreciating assets. The transferor and company must jointly claim s 165 relief within five years from 31 January following the tax year of transfer to the company.

 

Therefore, if he only transferred the equipment at the TWDV of say £100k, it would be Dr Assets and Cr Directors loan, giving him £100k to draw down from the company tax efficiently and as the assets are equipment, not appreciating assets liable to CGT, on cessation of this trade he would pay income tax on any balancing charges?  Also, what are the VAT implications of this since it isn't a transfer of going concern, just equipment?

 

Sorry for all the questions.  I'd love to be able to speak to someone on this if they're available.

 

Thanks

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By Settingupalone
27th Mar 2012 11:48

I too have a couple of clients who would benefit from incorporation. I too lack experience in the 'nitty gritty' of an incorporation process but I would advise that you get hold of this book:- Incorporating a business by Roger H Jones (3rd edition). Its great there are a series of checklists regarding the incorporation process.

Looking at your post you have not mentioned the valuation of goodwill to be transferred. A very specialist subject and probably best to obtain a professional valuation.

No doubt there will be a follow of helpful tips and comments from the experienced AW members but the book is well worth getting hold of.

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By BMary83
27th Mar 2012 12:15

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Hi Settingupalone

The goodwill bit is the bit I understand, I realise that here I would need to get an independant valuation of goodwill and this value can then be credited against the Directors loan account which they can then draw down tax efficiently.  The CGT gain made on the goodwill will then qualify for Entreprenuers relief as this is a business asset for the sole trader.

The bit I'm struggling with is the transfer of the equipment, as it is not a chargeable asset for CGT, can it really be as simple as crediting the Directors Loan account with the value of the assets?  I feel like I'm missing something fundamental here. 

PS I will definately look into getting that book. 

Thanks

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By neileg
27th Mar 2012 12:51

VAT

From what you have said, this would be a TOGC for VAT purposes.

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By BMary83
28th Mar 2012 13:55

Ok, I've read this on a couple of websites now

Ok, I've read the below on a couple of websites now:

Selling the assets to the new company (even if the sale proceeds cannot yet be paid as the company has no cash), so long as the gain realised on the sale is within the 10% rate of capital gains tax under entrepreneurs’ relief. The proceeds will usually be left outstanding as a debt due from the company to be drawn tax free as and when available profits produce cash funds in the company.

 

So is my thinking correct that given he will only be transfering equipment rather than chargeable assets, mean that he will only pay tax on any balancing charges of the partnership?

Can anyone advise how this affects the share value of the company?  Can I issue the shares a nominal value or should a value be attached to them in the same way as if you were incorporating using S162 relief?

 

Would appreciate any advice.

Thanks

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