Is Incorporation Relief restricted if share premium converted to P&L Reserves?
Am I missing something really obvious here?
A client wishes to incorporate a post April 2002 business and makes around £40,000 profit each year. Business is valued at £160k. If I take the business down the incorporation relief route (which is automatic) The goodwill credit ends up in the share premium as normal.
If the company then does a bonus share issue to convert share premium to share capital, and then a reduction in share capital to convert amount into distributable profits, is the incorporation relief affected?
If this is ok, my client can then take out £40k in dividends each year tax free, as if the goodwill is amortised at £40k each year and profits are £40k each (except for goodwill) then there is no corporation tax to pay.
Is this too good to be true? I always thought Entrepreneur's relief was the way to go, with only 10% tax, but £NIL tax is even better. Have I missed a trick? My client has no other source of income.
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