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Def tax on transfer of assets to company

Partnership assets transferred to company Tax WDV nil - deferred tax debit

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Husband and wife had two businesses - partnership and limited company.

During last year the assets and trade of the partnership were transferred at book value to the company with credit to DLA.

As both parties elected to transfer assets for cap all purposes at WDV (Nil) there will be an immediate need for a deferred tax provision in the limited company accounts.
First thought was credit provision debit deferred tax chareg in P&L. Then wondered if this is the correct (only?) way to do it. 
If agreed, could it be debited to DLA? Is there a choice?

If the former then share value is lower and DLA is higher giving more taxfree funds to draw.
If the second alternative then shareholders funds higher DLA lower. 
In this case as shareholders and directors are the same it would seem first alternative is favourite??

TIA

 

Replies (6)

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By Biggsy2020
21st Sep 2020 09:27

Definitely not DLA! It will be C/D Profit or Loss and C/D deferred tax provision.

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Replying to Biggsy2020:
By johngroganjga
21st Sep 2020 12:57

Not sure I agree. Logically, it's a factor affecting the price of acquiring the business and assets, and the DLA is where the price before taking into account the DT is credited.

Thanks (1)
Caroline
By accountantccole
21st Sep 2020 11:40

What FRS will they be using as some don't allow deferred tax at all.
The signing of the election at TWDV should have been built into the "negotiations" at the time of the sale and potentially reflected in the sales price

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Replying to accountantccole:
By pushtheriver
21st Sep 2020 12:09

Thank you. It's FRS102 a. So my understanding is deferred tax is required. I will check the agreement drawn up by clients' solicitor. Thankyou for your time.

Thanks (0)
Psycho
By Wilson Philips
21st Sep 2020 14:17

First answer is most likely the correct one. The latent tax may or may not have been factored into the sales price but the price paid is the price paid. The D/T charge arises as a consequence of the TWDV election (which could have been made some time after the transaction). I can see no logical argument for taking it to the DLA.

Except perhaps one - if the transfer agreement stipulated that consideration was to be net assets/liabilities of the partnership, with an appropriate definition of assets and liabilities.

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Replying to Wilson Philips:
By johngroganjga
21st Sep 2020 14:39

I agree if the price paid (i.e. the amount already credited to the DLA) is spelt out in this seemingly rather pointless transfer agreement, rather than just the means of arriving at it, but not otherwise.

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