Double entry when incorporating under incorporation releif

Double entry when incorporating under...

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Hi All,

I'm having a rather dim day I'm afraid.

Sole trader incorporating business.  Incorporation relief is being used so we are transferreing all assets and liabilities to the Ltd company except cash.  So any cash that goes in will be Dr bank Cr DLA as it's a personal investment, but what's the balancing entry on the rest?

Two shares have already been issued in the Ltd Co on formation (nearly a year ago but dormant since then), one to sole trader one to his wife.

So obviously I Dr the assets and Cr the liabilities.  Can the transfer be in return for the share the sole trader already has or do I need to issue some (or one) more?  If the net asset value is £5000 and the share is a £1 share does the £4999 go to share premium?  Or do I have to issue another £5000 shares - I'd like to stick with just the two we have to avoid having to transfer the shares from husband to wife (so as to even out the shareholding).  I'm sure I should know the answer to this but for some reason just can't work it out today.

Thanks in advance for your help.

BG

Replies (5)

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By Sloane Walker
11th Feb 2013 10:49

DLA

Hi

The value of the fixed assets are sold by the sole trader to the company.  So you would debit the fixed assets on the balance sheet at market value and the credit goes to the directors loan account.

Hope that helps.

Kind regards

Dave

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Replying to DMGbus:
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By Batty Girl
11th Feb 2013 15:07

Thanks - is this still the same when using incorporation relief

Hi,

Thanks for the reply.

This is what I would have done if disapplying incorporation relief, but wouldn't this mean that the client was getting cash consideration?  For incorporation relief to apply to the whole gain I understood they had to transfer the business, together with all the assets of the business, in exchange wholly or partly for shares.  If I credit the DLA wouldn't this mean that this was in exchange for cash and incorporation relief wouldn't apply?

Am I just being a bit daft here - I feel like I'm probably missing something obvious.

Thanks

BG

 

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Steve Edwards
By stevo5678
24th Feb 2013 09:21

Hi, I am in a similar situation and I have got as far as you have.  I was thinking along the lines of a share premium account as this seems to be logical.  If it goes to the DLA as a credit he is effectively receiving cash.

However I was thinking about a combination of the two, say £10k to DLA to take advantage of the CGT annual allowance plus the rest to share premium?  This would mean in my head that £10k of the gain is being realized now.

I assume there are no issues with creating a minimal amount of goodwill to take advantage of the CGT AA as the rules seems to be more focused on people inflating goodwill to claim additional relief by w/o the goodwill (if created after Mar 2002).

However I am also not 100% as all the practices I have worked in have simply DR assets etc CR DLA!

Some thoughts would be much appreciated!

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By User deleted
24th Feb 2013 14:29

First response (DLA)

Applies only where business not transferred wholly in exchange for shares.

Existing shares (particularly where held for some time) cannot be said to have been issued in exchange for the business (how can you issue to yourself something that you already hold?).  Any excess of value of shares issued over nominal value will go to share premium.

 

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Replying to scrasey:
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By Batty Girl
24th Feb 2013 16:04

Thanks BKD

BKD, thanks for this.

So can I check I've understood right?

I do need to issue new shares rather than just treat this as a premium paid for shares already held.

If the net asset value of assets transferred is £5000 I could issue shares with the nominal value of £5000 or alternatively I could say issue 2 shares with a nominal value of £2 and record a share premium of £4998.  I could then transfer one of the shares to the wife as a spousal transfer at no gain no loss to even out the shareholding.  There's nothing to report on the tax returns of either at this time as the business went over under incorporation relief and the spousal transfer is no gain no loss?

Really appreciate the help on this one.  Thank again.

BG

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