Business transfer sole trade to company

Transfer of sole trade to company with more than one class of shares but one director.

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Hi,

I am a solo practitioner and one of my clients approached me with a request to transfer his sole trade business to a limited company. I have not done this before myself and would need confirmation if my process is correct.  I estimated the goodwill of the business to be approx. £25,000 (based on his client list and profit for the last two years). There is very minimum of other assets (approx. £1,500).  I will be filling the form CG34 to have HMRC blessing.  When applying Business disposal relief the CGT will be approx. £1,420 (this is for the tax year 2020/21).  The client's limited company was set up a couple of years ago by himself and I submitted the dormant account for the last year.  However, when the client set up the company he issued class A shares & class B shares (10 shares each).  The B shares are allocated to the client's wife.  My question is if these class B shares make any difference in the transfer or can I process the transfer as detailed above?  He is the only director of the company and the transfer will be credited to his DLA. 

My second question is about the goodwill in the company. As the goodwill doesn't include any IP therefore it's not tax deductible. Am I correct or did I miss something?

Thank you

Replies (13)

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By Paul Crowley
30th Oct 2020 14:32

No BADR, according to my reading

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Replying to Paul Crowley:
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By Vladka
30th Oct 2020 14:57

Hi Paul,
Can you please clarify why do you believe that my client doesn't qualify for BADR?
Many Thanks

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By Paul Crowley
30th Oct 2020 14:34

Business transfer sole trade to company
Transfer of sole trade to company with more than one class of shares but one director.

Hi,

I am a solo practitioner and one of my clients approached me with a request to transfer his sole trade business to a limited company. I have not done this before myself and would need confirmation if my process is correct. I estimated the goodwill of the business to be approx. £25,000 (based on his client list and profit for the last two years). There is very minimum of other assets (approx. £1,500). I will be filling the form CG34 to have HMRC blessing. When applying Business disposal relief the CGT will be approx. £1,420 (this is for the tax year 2020/21). The client's limited company was set up a couple of years ago by himself and I submitted the dormant account for the last year. However, when the client set up the company he issued class A shares & class B shares (10 shares each). The B shares are allocated to the client's wife. My question is if these class B shares make any difference in the transfer or can I process the transfer as detailed above? He is the only director of the company and the transfer will be credited to his DLA.

My second question is about the goodwill in the company. As the goodwill doesn't include any IP therefore it's not tax deductible. Am I correct or did I miss something?

Thank you

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Psycho
By Wilson Philips
30th Oct 2020 14:51

No BADR

And no amortisation relief - but for a different reason than the one given.

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Replying to Wilson Philips:
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By Vladka
30th Oct 2020 15:13

Yes, no amortisation relief as connected party/individual & no IP. Sorry, didn't write all the reasons before.
However, still don't get the reason for no BADR is it because of the shareholding?

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By Tax Dragon
30th Oct 2020 15:35

TCGA s169LA(1) Subject to subsection (1A), subsection (4) applies if –
(a) as part of a qualifying business disposal, a person (“P”) disposes of goodwill directly or indirectly to a close company (“C”), and
(b) immediately after the disposal, P meets any of the personal company conditions in the case of C or any company which is a member of a group of companies of which C is a member.

169LA(1ZA) For the purposes of subsection (1)(b)–
(a) the reference to the personal company conditions is a reference to any of the conditions in 169S(3)(a), (b), (c)(i) or (ii), and
(b) P is taken to have all the rights and interests of any relevant connected person.

169LA(1ZB) For the purposes of subsection (1ZA)–
(a) section 169S(3) is treated as having effect with the omission of the references to “by virtue of that holding”,
(b) section 169S(3A)(a) and (b) are to apply for the purposes of section 169S(3)(c)(ii) but as if the reference to the final day of the period mentioned in section 169S(3A)(a) were to the time immediately after the disposal, and
(c) the condition in section 169S(3)(c)(i) is to be read as containing two separate conditions (one relating to profits and the other relating to assets).

169LA(1A) Where–
(a) subsection (1)(b) applies by virtue of Pʼs ownership, or any relevant connected personʼs ownership, of Cʼs ordinary share capital, and
(b) the conditions mentioned in subsection (1B) are met,

subsection (4) does not apply.

169LA(1B) The conditions referred to in subsection (1A)(b) are–
(a) P and any relevant connected person dispose of Cʼs ordinary share capital to another company (“A”) such that, immediately before the end of the relevant period, neither P nor any relevant connected person own any of Cʼs ordinary share capital, and
(b) where A is a close company, immediately before the end of the relevant period–
(i) P and any relevant connected person together own less than 5% of the ordinary share capital of A or of any company which is a member of a group of companies of which A is a member, and
(ii) P and any relevant connected person together hold less than 5% of the voting rights in A or in any company which is a member of a group of companies of which A is a member.

169LA(1C) In subsection (1B) “the relevant period” means the period of 28 days beginning with the date of the qualifying business disposal, or such longer period as the Commissioners for Her Majestyʼs Revenue and Customs may by notice allow.

(2) and (3) omitted

169LA(4) For the purposes of this Chapter, the goodwill is not one of the relevant business assets comprised in the qualifying business disposal.

169LA(5) If a company–
(a) is not resident in the United Kingdom, but
(b) would be a close company if it were resident in the United Kingdom,

the company is to be treated as being a close company for the purposes of this section.

169LA(6) If a person–
(a) disposes of goodwill as part of a qualifying business disposal, and
(b) is party to relevant avoidance arrangements,

subsection (4) applies (if it would not otherwise do so).

169LA(7) In subsection (6) “relevant avoidance arrangements” means arrangements the main purpose, or one of the main purposes, of which is to secure–
(a) that subsection (4) does not apply in relation to the goodwill,
(b) (omitted)

169LA(8) In this section–
“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable);
“group” is to be construed in accordance with section 170;
“relevant connected person” means–
(a) a company connected with P, and
(b) trustees connected with P.

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Replying to Tax Dragon:
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By Paul Crowley
30th Oct 2020 15:43

That sums it up nicely
Thanks TD
Mine would probably have been a bit verbose.

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Replying to Paul Crowley:
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By Tax Dragon
30th Oct 2020 16:01

My most authoritative post ever.

I'm still working out what it all means myself! :-)

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Replying to Tax Dragon:
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By Vladka
30th Oct 2020 15:49

Thank you

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By bettybobbymeggie
30th Oct 2020 17:38

Have you considered incorporation relief?

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Replying to bettybobbymeggie:
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By Vladka
30th Oct 2020 18:07

Yes, I did and it's another option.
Or reduce the goodwill to be within the personal allowance limit for CGT.

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Replying to Vladka:
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By Paul Crowley
30th Oct 2020 20:52

It is worth 20% to get the Directors loan credit
Especially if a 40% is his tax rate

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By Rweaver
30th Oct 2020 17:52

I feel you’re a little misguided if you think HMRC will give their “blessing”.

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