Partnership to limited company - assets

[_1LD]

I have been operating as a photography company as a partnership for 4 years and I now wish to incorporate into a limited company.

I have acquired over the years a lot of equipment. I have looked at what it is all worth second hand and it comes to £26K.

When I bring that into my company what happens? If I "sell" it do I have to pay capital gains tax on it? If not do I just end up with £26K owed to me by the company in the directors loan account?

I had a meeting today with an accountant but it was really unclear so I am meeting them again next week, and want to go with a more clear head,

 

[Clare@ClarityTaxation]

There's a specific relief available when you convert to a limited company, called Incorporation Relief. It can reduce any potential CGT to zero in some cases, so worth asking the accountant about. Also ask him to check whether it's worth it though, as I seem to remember it can adversely effect eventual taxes on close down (entrepreneur's relief etc). Sometimes it's worth paying more tax now to save even more tax later.

 

[_1LD]

So are you saying that unless I use Incoporation Relief there is in fact capital gains on my equipment?

Why is there a capital gain on it when it is worth less than what I paid for it?

 

[Clare@ClarityTaxation]

There's potentially CGT when you sell assets, which is effectively what you do when you pass them over to a limited company. That's what your accountant needs to work out for you, as he'd have all the necessary information (costs & present values etc).

 

[_1LD]

what about goodwill - do I have to give a value to goodwill? The company has about £70K of booked business over the next 18 months

 

[Clare@ClarityTaxation]

Then yes, it has some value and needs to be considered.

Have a read through here: https://www.gov.uk/incorporation-relief

It works by reducing the base cost transferred, which may or may not be beneficial later on. I would drop an email to your accountant before you meet them next week and ask them how it would apply in your situation, whether they would recommend it, and the implications for a later sale/dissolution. Gives them time to prepare some calculations on each basis before you meet them again next week. I personally find emails can be better sometimes too as it gives you time to digest and re-read the advice!

 

[_1LD]

Ok thanks

Now then. I understand that if I do sell the assets and goodwil on without this incorporation relief I would ou capital gains tax on them but the company would then owe me the amount I sold them to it for. Which I could then withdraw via the directors loan account.

What happens if I am able to use the incorporation relief. Does the company then owe me nothing?

 

[UK Contractor Accountant]

There's no chargeable gain on your equipment transferred to ltd co - it will only be on goodwill.

Whether the goodwill is worth anything is another question?

 

[_1LD]

Right thanks so the equipment can be transfered with no capital gain.

Does the company owe money to me for me transferring the equipment to it though?

 

[Clare@ClarityTaxation]

Ok thanks

Now then. I understand that if I do sell the assets and goodwil on without this incorporation relief I would ou capital gains tax on them but the company would then owe me the amount I sold them to it for. Which I could then withdraw via the directors loan account.

What happens if I am able to use the incorporation relief. Does the company then owe me nothing?

The value stays the same for transfer purposes, but the base cost of your new shares is reduced (so later on when you come to sell the shares your gain is greater at that point).

 

[UK Contractor Accountant]

personally I would not bother with Incorporation relief as you will not establish a tax free director loan balance in the company using IR.

As a partnership (of 2?) you will each have an annual capital gains allowance of £11.1K so joint gains up to £22.2K will not be taxed anyway whilst at the same time you will have £22.2K tax free to draw from the ltd co.

Subject to of course proper goodwill valuation.

 

[UK Contractor Accountant]

duplicate

 

[_1LD]

personally I would not bother with Incorporation relief as you will not establish a tax free director loan balance in the company using IR.

As a partnership (of 2?) you will each have an annual capital gains allowance of £11.1K so joint gains up to £22.2K will not be taxed anyway whilst at the same time you will have £22.2K tax free to draw from the ltd co.

Subject to of course proper goodwill valuation.

Yes I was thinking the same.

What happens if the goodwill is deemed to be worth more than 22k though? I'll have to pay 28% capital gains tax on the additional goodwill won't I.

 

[UK Contractor Accountant]

No - 10% or 20% depending on whether you are a higher rate taxpayer.

Your Accountant should be advising you on this. If you are not happy with advice being given then you need to change Accountants.

 

[Clare@ClarityTaxation]

CGT depends on your overall level of income, so it could be a mix of 10% and 20%. If Entrepreneur's Relief applies then it's a flat 10%.

If you don't want Incorp Relief to apply just remember to elect for it not to apply. I'd still ask the accountant for calculations though, just so you know the full details of either option.

As above though, you really do need to talk it through with your accountant. They will have all relevant information to hand, and can give specific advice based on your full overall tax position (we may be missing something vital that we're not aware of).

 

[_1LD]

I thought capital gains tax with a connected person is 18% for lower tax band and 28% for higher. That's what it says on hmrc

No - 10% or 20% depending on whether you are a higher rate taxpayer.

Your Accountant should be advising you on this. If you are not happy with advice being given then you need to change Accountants.

 

[_1LD]

CGT depends on your overall level of income, so it could be a mix of 10% and 20%. If Entrepreneur's Relief applies then it's a flat 10%.

If you don't want Incorp Relief to apply just remember to elect for it not to apply. I'd still ask the accountant for calculations though, just so you know the full details of either option.

As above though, you really do need to talk it through with your accountant. They will have all relevant information to hand, and can give specific advice based on your full overall tax position (we may be missing something vital that we're not aware of).

Enterepreneurs relief ended with goodwill last year I read.

I have another meeting with accountant next week just trying to brush up to get my questions ready

 

[_1LD]

See here it states 18 or 28 not 10 or 20

Put gov and uk in front of this

/capital-gains-tax/work-out-your-capital-gains-tax-rate

 

[David Griffiths]

See here it states 18 or 28 not 10 or 20

Put gov and uk in front of this

/capital-gains-tax/work-out-your-capital-gains-tax-rate

Then it's out of date, or referring to the tax year ended 5 April 2016. Any disposal now will be at the rates for 2016-17 (10% or 20%)

 

[_1LD]

Ah yes I see.

Why the hell didn't my accountant know that