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Personal assets transferred to own company

Can my client's substantial personal assets be transferred to his company at cost?

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The company has no funds to pay for these assets and their value will simply be credited to the director's loan account. The assets are goods for resale and were acquired with the intention of being transferred to the company. They are appreciating assets and are intended to be held by the company for some 10-20 years before their eventual sale, i.e. no funds will be generated for 10-20 years. The assets have appreciated some over their initial cost and if market value was used as the base for the transfer, it would give rise to a capital gain for my client - who would then have tax to pay even though no funds had been generated and no cash had been received. It would seem fairer and more reasonable to use cost as the base for this transfer, given the long term nature of these assets. Crystalising a nominal gain at this early stage would not be fair and seems wrong, a bit like a company's stock being revalued each year at market value and the resulting book profits giving rise to an annual tax bill, again without any funds having been realised. This doesn't happen: stock is valued at the lower of cost or NRV, not the higher. Accordingly, given the long-term nature of these assets, would using cost as the basis for this transfer be acceptable? Obviously when the assets are eventually sold, the company would pay corporation tax on sale price less cost so there is no loss to HMRC. It is in effect just a timing issue. If my client does proceed with using cost for the transfer, is there any action he needs to take now? e.g. to advise HMRC or not?

Thanks for any assistance here, it will be appreciated.

 

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12th Aug 2019 17:17

To use historical cost as the basis for valuation would be fine and potentially a very usual practice here - as long as all assets of that class are treated the same way.

Initially, no this would not give rise to any VAT being due on the transfer.
That being said, when your client would like to revalue them to reflect current market value (no reason to do this unless they are looking to perhaps take on leverage against the assets) they will have to disclose a change in accounting policy in the annuals and there will be a large revaluation and therefore a deferred tax liability on the balance sheet from then on if only revalued and not sold onward at that time.

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to Mr Winston
13th Aug 2019 13:01

The initial tax concern is a potential capital gains tax bill for the client if unable to transfer at cost.

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12th Aug 2019 17:25

I hope Svg888 is inspired by this thread.

Inspired that is to pay for advice.

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By DJKL
12th Aug 2019 17:42

I know you mention stock but they do appear to possibly have the suggestion of nil coupon investments, insofar as I have understood your client will do nothing with them but sit and hold.

"They are appreciating assets and are intended to be held by the company for some 10-20 years before their eventual sale, i.e. no funds will be generated for 10-20 years."

But we then have

"The assets are goods for resale and were acquired with the intention of being transferred to the company."

Perhaps some indication of the nature of these assets and the length of time your client has personally already held might assist in considering whether they are indeed stock or they are chargeable assets liable to CGT.

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to DJKL
13th Aug 2019 12:59

Yes, an understanding of the goods may help clarify things, although I did say goods for resale. The goods are casks of whisky, some 70 thereof, and whisky in storage is an appreciating asset. Some of these were acquired in lieu of settlement of a legal action and thus have effectively nil cost but substantial market value.

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12th Aug 2019 17:58

The key piece of information missing is - what kind of assets are these ?

Because if they're widgets for reselling in a trade, I'll give you a different answer than if they were, say, some kind of financial bond (as is implied).

Economy with the facts is unwise.

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to lionofludesch
13th Aug 2019 13:03

As above - casks of whisky, for eventual sale in 10-20 years.

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13th Aug 2019 10:25

Am I totally out of touch? How can they be transferred at less than MV ?
Anything else gives rise to possible tax evasion and HMRC will be jumping up and down

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to bernard michael
13th Aug 2019 10:52

bernard michael wrote:

Am I totally out of touch? How can they be transferred at less than MV ?

That was my initial thought but there are various reliefs which might apply if the OP ever gives some facts.

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to Accountant A
13th Aug 2019 13:18

So do casks of whisky (stock for resale) fall within CGT? And if so, are there some reliefs available?

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to Micawber
13th Aug 2019 14:32

Micawber wrote:

So do casks of whisky (stock for resale) fall within CGT? And if so, are there some reliefs available?

I'm thinking trading - albeit an involuntary trade.

Even one cask of whisky is a fair few tots, so he must have agreed to take them with a view to selling them on.

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to lionofludesch
13th Aug 2019 15:10

The casks were certainly acquired with a view to passing them over to his company to sell in due course - or indeed to bottle and sell. There was no personal profit intended - the ultimate profit was always to be the company's. The owner is not involved in any trading on his own account.

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to bernard michael
13th Aug 2019 13:14

Well, that's the issue but this is a book transfer - no cash received. The assets, casks of whisky, will not produce any cash until sold in 10-20 years. Would cost not be an acceptable basis here?

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13th Aug 2019 13:59

If they have a cost based on the legal action the cost would be the final agreed benefit your client derived not a NIL cost

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to bernard michael
13th Aug 2019 14:11

Yes I know but I don't believe a figure was ever arrived at - so no doubt an MV of those casks at date of settlement would have to be calculated.

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13th Aug 2019 14:29

I've done some further research and it looks like casks of whisky would be classified as chattels. That being the case, as long as the MV of each cask was below £6,000, then no CGT would apply. (Not sure if that's the case.)
That then prompts the question: would it actually be beneficial (and acceptable?) to use MV (if below £6k) for the transfer? This would reduce the ultimate profit for the company and still avoid any personal CGT. (Obviously all casks would have to be transferred on the same basis.)

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By DJKL
to Micawber
13th Aug 2019 14:36

Given the CGT regime possibly applies to this whisky that does beg the question:

Is it a good idea to put such assets within a company wrapper from a tax perspective?

Of course there may be other reasons the owner wants them within a company.

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to DJKL
13th Aug 2019 15:05

Yes, the owner has a whisky trading company and is involving his offspring. This is part of a greater whole and the transfer has been made. It is just a matter of at what valuation basis now.

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By DJKL
to Micawber
13th Aug 2019 15:15

When the individual owned the whisky did he own it as part of his stock in trade as say a sole trader " whisky trader" or is the company into which he has already transferred the whisky his first activity as a whisky trader?

Is what the company is going to do with the whisky a trade anyway?

Was what he did with the whisky before its transfer to the company a trade?

Why would his personally holding the whisky be/not be a trade yet the company holding the whisky would be a trade?

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to DJKL
13th Aug 2019 16:28

Er, yes, these are the complexities. My understanding is that the owner acquired casks with a view to forming a company to hold them until sufficiently mature, and for the company to then bottle the product and sell it. He wasn't a sole trader and did nothing with the casks until they were transferred. So I would say his involvement was not a trade but the company's involvement is. Slightly tricky to get it into black and white though.
(Actually that's a pretty good whisky pun for those who remember those 2 Scotty dogs!)

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By DJKL
to Micawber
13th Aug 2019 17:14

As long as he does not grouse about the tax outcomes.

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to DJKL
13th Aug 2019 17:46

Well he's certainly not ringing any bells just yet.

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13th Aug 2019 16:00

This is clearly whisky acquired for the purpose of trade. Could TCGA s.161(3) be the answer?

What about funding VAT?

Valuations at all relevant dates will be required

Is there a legal question in relation to licences to deal in spirits.

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to Montrose
13th Aug 2019 17:01

Perfect!! Many thanks indeed Montrose, that reference TCGA92/S161(3) looks to be the exact and complete answer. It is the reasonable position for CGT that I had hoped might be out there somewhere. HMRC's manual provides clear language: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg69200 and an election to defer the CGT charge and account for the full profit within the company is absolutely the answer. Many thanks again for that.
As regards your other points, is there a VAT issue at date of transfer of the casks from individual to company? Do hope not.
Valuations will need to be carried out, agreed.
And yes, a licence was indeed required by the company and HMRC took a great deal of time and input to eventually provide it, adding to the delay in transferring the casks.
Your input is very much appreciated.

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to Micawber
13th Aug 2019 17:21

VAT is not my field, but I fear it is in point.

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to Montrose
13th Aug 2019 17:50

As the assets were not acquired as part of a trade and no trade was carried on by the owner, I would hope that no VAT would be applicable to the transfer of the assets to the company. However I will research further.

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to Micawber
13th Aug 2019 17:54

Micawber wrote:

As regards your other points, is there a VAT issue at date of transfer of the casks from individual to company? Do hope not.

Is this an issue ? The individual pays it, the company claims it back.

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14th Aug 2019 09:50

I trust your fee will be in casks rather than sterling

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14th Aug 2019 11:11

How does s161(3) help? I thought the gain you wanted to defer was the one on the transfer to the company; s161 is all about appropriations of personal assets to trading stock (and vice versa) without a change of ownership. As HMRC recognises in CG29200.

Unless you want to argue that the individual, whom you say did not have a personal sole trade prior to the transfer, in fact started such a trade (unlicensed), transferred the casks to that trade as stock and then very quickly transferred that stock to a company and ceased the sole trade, s161 simply is not in point.

Even if it were, the valuation issue does not go away, at least for CGT. Don't forget that the disposal to the company was a disposal. There's no rule that says a disposal of trading stock is not a disposal for CGT. 999,999 times in 1,000,000, that would not matter, because most trading stock would be covered by a CGT exemption. Presumably, if you were confident that an exemption applied in this case, you wouldn't have asked the question and you wouldn't have been so pleased with (the utterly irrelevant, IMHO) s161.

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to Tax Dragon
14th Aug 2019 15:48

Hmm, well this is why I came here, so thanks for the counter-opinion. Is the change of ownership an issue? S161(3) recognises that "Collection difficulties might arise because tax on chargeable gains may become due and payable before there has been a factual disposal of the asset. To relieve this problem, the trader may make an election under TCGA92/S161 (3)." That was the initial concern. The owner was not licenced to trade in whisky, he had acquired casks, he was advised to start a company to get licenced, that took a little time to achieve, at which point he transferred the casks. He controls the company and it is his trading vehicle. The principle of S161(3) still applies as no casks have been sold and there are no funds to pay CGT. Equally it seems right that the full profit on eventual sales should fall within the company. In these circumstances, would S161(3) not be applicable? It would seem unreasonable if not.
The valuation aspect would not be a problem provided S161(3) applies: the gain is offset against the cask values when casks are sold by the company, effectively reducing them back to cost. But the capital gain on transfer does need to be deferred for the individual.
So the key issue is whether S161(3) would apply here or not?

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to Micawber
14th Aug 2019 15:57

Micawber wrote:
The owner was not licenced to trade in whisky ....

Thanks for letting us know that. It begs the question of whether he could ever have legally owned these casks or whether he is contracting on behalf of the new company.

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to lionofludesch
14th Aug 2019 16:04

Rubbish. You don't need a licence to own whisky. Do you?! I better apply, quick.

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to lionofludesch
14th Aug 2019 16:07

But, joking aside, I agree your underlying point.

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By DJKL
to Micawber
14th Aug 2019 15:58

As a matter of interest whilst personally holding the casks did the owner incur costs, for instance does the Whisky Bond not charge storage/handling costs? If so what about these costs, how does the individual intend to recover these costs/obtain relief for these costs? Does his incurring these costs increase the trading as an individual argument?

Maybe if he had traded as an individual incorporation relief might have been an option, appreciate it sounds like transaction to company has been done, on the other hand if no price ascertained prior to transfer to company has ownership contractually passed to the Limited Company (presuming he is not in Scotland ,though the Whisky may be)

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to DJKL
14th Aug 2019 16:26

Yes, storage and insurance costs have been incurred and paid by the owner prior to the transfer. These increase the cost of the casks transferred, and hence reduce the gain somewhat.
The 'trading as an individual' argument has not been considered up to now. Might be a bit late in the day?

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to Micawber
14th Aug 2019 16:08

Micawber wrote:

Is the change of ownership an issue?

Yes. It (if it happened) is THE issue.

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to Tax Dragon
14th Aug 2019 16:25

Correct me if I've misunderstood the facts here, but this guy has agreed to take some casks of whisky in satisfaction or part satisfaction of some personal debt.

Whilst the actual quantity is unclear, it seems to be "A Lot" and it would be fair to assume that he's only agreed to accept it on the basis that he can sell it on. For me, the principle in Rutledge v CIR applies and he's personally liable for income tax on the difference between acquisition cost (amount of debt cancelled in exchange for the whisky) and the value at which the whisky was transferred to the company. Less any allowable expenses along the way.

All assuming that the taxpayer didn't need a licence.

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to lionofludesch
14th Aug 2019 16:39

What? If it was personal debt, how was he acquiring on behalf of the company (which is what I thought you were wondering)?

I thought he'd simply invested for profit (which I agree is trade motive) and later discovered he had to have a company for some annoying legal reason.

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to Tax Dragon
14th Aug 2019 16:45

Why not ?

If I want to buy something for a company that I own, I can use my own money and get reimbursed later, can't I ?

However, I'm still not absolutely clear what the circumstances of the case are. I'd be happier if we decided what's happened before we talk about possible tax consequences. We seem to be starting with what we want to have happened and are massaging the facts to make it so.

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to lionofludesch
14th Aug 2019 17:44

There are certainly complexities here but to summarise: the individual built up a sizeable amount of whisky casks, mostly paid for with own funds, for personal use and investment, then considered future bottling, formed a company to get licenced for that, then transferred the casks to the company for no cash, just a credit to the director's loan a/c. The transfer was intended to be at costs incurred only.
So, for the individual, the transfer was either a disposal for CGT or (perhaps) a sale by way of a short-lived trade, if that argument is legitimate.
Certainly the intention is to have the company, not the individual, take full profit from the eventual sales.
That sort of situation ought to be fairly common where an individual has built up a personal collection of some valuable stuff, forms a company to sell the items and thus transfers his collection to the company. It would seem reasonable that there should be some mitigation or deferral of CGT in these circumstances.
(And I'd hoped S161(3) did just that.)

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to Micawber
14th Aug 2019 17:56

Micawber wrote:

So, for the individual, the transfer was either a disposal for CGT or (perhaps) a sale by way of a short-lived trade.

I don't see it as either/or.

That quantity of whisky indicates a trading motive. Correct me if I'm wrong, but there's no connected-person MV rule for trade sales (there is for own use, but that's not what's happened).

There is a connected person MV rule for CGT - and therein lies your problem.

Edit: another long thread has run into "how am I supposed to follow this discussion?!" mode.

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to Tax Dragon
14th Aug 2019 18:27

Many thanks indeed for your input here, it has been really helpful. If S161(3) falls by the wayside because of the transfer to the company, then considering this as a trade sale might be the correct approach - providing it doesn't look artificial given the transfer took place partly in 2017/18. There do seem to be a number of tax cases that support single transactions as in the nature of trade so that will now be examined.

And yes, perhaps enough already! But great thanks indeed to everyone who contributed.

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to lionofludesch
14th Aug 2019 16:41

Only a couple of casks were acquired as settlement of a legal case, no big deal; the others were bought with own funds. There is a personal use argument, certainly at the outset and perhaps still, but holding as an investment was also in the mix. This developed into considering the option to bottle in future which in turn brought the company into play as the vehicle for this. The transfer to the company was intended to be at cost and so the principle in Rutledge v CIR should not apply - there is no profit until sales are made, either of casks or of bottles, at some point in the future.

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to Micawber
14th Aug 2019 17:00

I'd missed the whole legal settlement point above. I'd also missed the 70 casks detail. That's a lorra whisky.

Whatever the other points, and irrespective of whether or not there had been a transfer to trading stock beforehand (to which s161 would apply), there is a disposal at the point of transfer to the company. It seems that the changes of intention do mean that there is such a disposal.

For CGT, that disposal is to a connected party at MV (arguably - and I would argue - less any amount charged to income tax at that point).

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14th Aug 2019 11:49

I'm still thinking trading.

Goods acquired with a view to subsequent sale.

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to lionofludesch
14th Aug 2019 12:00

I don't disagree. How do you deal with the CGT?

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to Tax Dragon
14th Aug 2019 16:09

Let me ask a lateral question here (which may need whisky sector experience): if casks of whisky are agreed by HMRC to be 'wasting assets', would that deal with the CGT? (As the wasting assets exemption would apply to the transfer to the company.) The owner is clear that, without further work done and cost incurred, casks of whisky depreciate over 50 years: evaporation reduces the alcohol content to a level that is no longer scotch whisky.
Should agreement be sought from HMRC directly?

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to Micawber
14th Aug 2019 16:22

Many houses look pretty shoddy after 50 years without some maintenance. Doesn't make them wasting assets.

And I do wonder what's in the £800,000 casks.

But... yes... I thought I'd seen this mentioned (or linked to) in one of the previous replies.

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to Tax Dragon
14th Aug 2019 16:54

Yes, but a neglected house would not normally turn into something other than a house (albeit shoddy) after 50 years - whereas whisky in a neglected cask will turn into something other than scotch whisky over that time. That's the argument the owner would maintain. What would be the next step? Further advice to be sought? Direct approach to HMRC now? Leave it to the self assessment tax return?

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