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Transfer from company to LLP

Transfer from company to LLP

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Can someone help please?

If a company wishes to become an LLP, but doesn't qualify for disk corporation relief because the assets are over £100k, what would be the most tax efficient way of doing this?

The balance sheet of the company contains goodwill purchased from a partnership on incorporation, but this is now worth much more, so this is the main sticking point.

I presume any gain made by the shareholders could be rolled over into their share of the LLP, assuming everything is transferred?

I'm thinking that the only impact would be that CT would be due on any increase in the value of goodwill, as this would need to be sold at MV due to the parties being connected.

Am I missing anything else? And is there any way to avoid/defer the CT on the goodwill "gain"?

Thanks in advance for your help

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By Steve Kesby
15th Sep 2013 11:57

You've missed one thing

The goodwill will either be subject to corporation tax under CGT rules or the corporate intangibles regime. Either way the transfer will be deemed to take place at market value.

Similar rules will apply to most other assets, other than items qualifying for plant and machinery capital allowances, where, if there's a sale, you can choose the transfer value to an extent.

The shareholders shouldn't have any gain on their shares, unless the company is liquidated. No rollover relief is available for gains on shares (other than EIS/SEIS reinvestment relief).

The killer blow though is that the assets are being distributed to the shareholders. The amount of that distribution though is determined according to company law and will be the excess of market value over the accounts carrying value (that is then represented by the share capital and reserves, that will also need to be distributed).

You could possibly avoid the distribution, but not the corporation tax effects, by a liquidation, but it's likely to be considered a transaction in securities, so that any gain will be taxed as a distribution.

Why does the company wish to be an LLP? What does the goodwill represent? Is it a brand or similar which could stay with the company and be licensed to the LLP?

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By dbowleracca
15th Sep 2013 17:27

It's for making admission of shareholders/partners easier
The company is a professional practice, so the goodwill represents the client base effectively. The reason for the transfer is to make the entry of new "partners" more cost effective than purchasing shares would be. In order to repay a loan for the shares you have to pay tax on the distribution from the business, whereas it's not as difficult or costly with a partnership where the capital account is basically repaid (subject to a valuation of the goodwill at the date of retirement).

Sounds like it's going to be costly and a nightmare!

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By YellowSticky
15th Sep 2013 20:03

I agree that Transactions in Securities anti avoidance might apply - you could try your luck with a clearance but if you're going to liquidate the existing company HMR&C aren't going to be very happy at all.

How much of a stake are your clients thinking of dishing out to new partners?

A solution could be to set up NewCo - transfer the IFA/trade and assets tax neutrally - and sell 25% to a new UK LLP which could have the new partners as partners.

There are pitfalls which need to be considered, and you might need a clearance!

Happy to help but you'll have to pay me my fees! HAHA! 

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