Transferring inventory to Ltd company

[Ivy j]

Hi all ,I’m hoping for a bit of advice about transferring inventory. I switched from sole trader to Ltd company last year(big mistake which I’m now learning) and had approx £1500 in inventory left in to transfer to my LTd company. Does this go down as capital gains on my sole trader tax return? Or do I sell it to my Ltd company and claim as income? I’m so confused by it all and can’t find any info about it online. Thanks so much in advance for any advice.

 

[Gyumri]

You can sell stuff to your Ltd. Capital gains tax is what it is so you declare it on your SAR.

Alternatively you don't take any payment from the Ltd for the inventory but it owes you the £1,500.

I assume in that case you wouldn't have to pay CGT until you received the money - but I am sure an accountant will be able to advise.

 

[NicoJ]

Have a look at incorporation relief, it applies automatically if you have transferred the business.

 

[Ivy j]

You can sell stuff to your Ltd. Capital gains tax is what it is so you declare it on your SAR.

Alternatively you don't take any payment from the Ltd for the inventory but it owes you the £1,500.

I assume in that case you wouldn't have to pay CGT until you received the money - but I am sure an accountant will be able to advise

Thanks for your repl.
It just makes more sense and seems simpler to me to transfer the inventory and pay for it from the ltd company. I can’t wrap my head around all this capital gains and incorporation relief from what I understand I have to basically trade the inventory for shares. I don’t understand any of that. I just want the simplest method.
I think I’ve bitten off way more than I can chew and don’t know how to proceed.

 

[Ivy j]

Have a look at incorporation relief, it applies automatically if you have transferred the business.

I had a look into that and I honestly don’t know how it works. I didn’t value my business before transferring it and I just bought 100% shares for £1 so I can’t wrap my head around how it works with the examples they use on the HMRC guidance. I regret incorporating so much at this point.

 

[GLAbusiness]

I think I’ve bitten off way more than I can chew and don’t know how to proceed.

When you are in a hole - stop digging. Now is the time to talk to an accountant (which is what you should have done before you set up the LTD)

 

[Ivy j]

When you are in a hole - stop digging. Now is the time to talk to an accountant (which is what you should have done before you set up the LTD)

Oh I know I should have( hind site is always 20/20) the problem is every good accountant right now is preparing tax returns for people who were actually organised so finding someone has proven almost impossible.

 

[numbersrule]

Hi Ivy j
Can you clarify exactly what your Inventory items are ?
I may be able to provide some common sense advice.

 

[NicoJ]

I had a look into that and I honestly don’t know how it works. I didn’t value my business before transferring it and I just bought 100% shares for £1 so I can’t wrap my head around how it works with the examples they use on the HMRC guidance. I regret incorporating so much at this point.

I echo the advice to speak to an accountant but the act of incorporating an existing business would mean that the stock automatically transferred. As the relief is automatic there are no tax implications at this moment in time, only when the ltd is wound down.

 

[Ivy j]

Hi Ivy j
Can you clarify exactly what your Inventory items are ?
I may be able to provide some common sense advice.

Thank you, My inventory is all bolts of fabric, and notions as Im a sewist. So Im just confused as to how this gets transferred.

 

[Ivy j]

I echo the advice to speak to an accountant but the act of incorporating an existing business would mean that the stock automatically transferred. As the relief is automatic there are no tax implications at this moment in time, only when the ltd is wound down.

So basically the remaining inventory goes to the ltd company? so I wouldn’t claim it as income as sole proprietor as I haven’t received any money from it?

 

[numbersrule]

Thank you, My inventory is all bolts of fabric, and notions as Im a sewist. So Im just confused as to how this gets transferred.

On this basis, I agree with NicoJ, this type of Inventory is readily transferred and normally there wouldn't be any Capital Gains Tax implications.
Think about it; Capital Gains Tax is only relevant when the value of the transferred item has resulted in a gain such as a property (Capital Asset) increasing in value.
The Inventory you describe is a Current Asset and you are entitled to transfer it at a fair price, which may for example be the price you originally paid for it.
In your new Ltd Accounts, the value of the Inventory will be transferred as a Current Asset as a 'Debit' to your 'Stock' or 'Sewing Supplies' or other relevant account name because your new Ltd now owns the Inventory.
The corresponding 'credit' would be to your Director's Loan account which would enable your new Ltd to pay yourself back when funds are available. I think ( you may need to check this ) that if you choose not to charge your company interest on the loan then there are no further tax implications.

In terms of your Final Self Assessment as a Sole Trader, you would 'debit' the Drawings account and 'credit' the Sole Trader 'Stock', or Sewing Supplies or whatever name you use for this. This would balance off that Current Asset account to zero and show via the Drawings account that you have received 'income' for the Transfer to your new Ltd.

So the tax you may need to pay would be income Tax via your Final Sole Trader Self Assessment.

PS I'm a Ground Investigator so do you have a friendly accountant you can ask about this?

 

[Ivy j]

I echo the advice to speak to an accountant but the act of incorporating an existing business would mean that the stock automatically transferred. As the relief is automatic there are no tax implications at this moment in time, only when the ltd is wound down.

On this basis, I agree with NicoJ, this type of Inventory is readily transferred and normally there wouldn't be any Capital Gains Tax implications.
Think about it; Capital Gains Tax is only relevant when the value of the transferred item has resulted in a gain such as a property (Capital Asset) increasing in value.
The Inventory you describe is a Current Asset and you are entitled to transfer it at a fair price, which may for example be the price you originally paid for it.
In your new Ltd Accounts, the value of the Inventory will be transferred as a Current Asset as a 'Debit' to your 'Stock' or 'Sewing Supplies' or other relevant account name because your new Ltd now owns the Inventory.
The corresponding 'credit' would be to your Director's Loan account which would enable your new Ltd to pay yourself back when funds are available. I think ( you may need to check this ) that if you choose not to charge your company interest on the loan then there are no further tax implications.

In terms of your Final Self Assessment as a Sole Trader, you would 'debit' the Drawings account and 'credit' the Sole Trader 'Stock', or Sewing Supplies or whatever name you use for this. This would balance off that Current Asset account to zero and show via the Drawings account that you have received 'income' for the Transfer to your new Ltd.

So the tax you may need to pay would be income Tax via your Final Sole Trader Self Assessment.

PS I'm a Ground Investigator so do you have a friendly accountant you can ask about this?

Thank you for this information, it makes sense. I’m currently in search of an accountant as I know I will definitely need one when it comes to sorting out my corporation tax. But your description has really helped make sense of what I need to do. Thank you

 

[Gyumri]

@NicoJ has referred to incorporation relief which would apply in this case. If the OP has converted from sole trader to Ltd then there is nothing to do as the business including all the inventory becomes the assets of the Ltd.

There is no CGT to worry about and nothing to declare on the SAR because nothing is actually being sold to the Ltd. In the future if the OP sells her shares in the Ltd then the complicated calculation on the HMRC site will apply.

Capital Gains Tax is only relevant when the value of the transferred item has resulted in a gain such as a property (Capital Asset) increasing in value.

Not quite correct but it doesn't matter in this case.

 

[Daybooks]

There are a number of considerations when transferring from a sole trader to a limited company including closing year rules, capital allowances, stock and losses. There are also some elections that can be made as the transfer will be between connected persons.

Stock is deemed to be transferred at market value but if between connected persons and appropriate elections made (and within time) it can be the higher of the cost to trader or price paid by the new company. This can have the effect of shifting profit between tradership and company so timing and relevant rates of tax should also be considered.

Whilst it is not the easiest of reads the rules are found in the Income Tax (Trading and other income) Act 2005 s178.

It is important to treat all the individual aspects together not separately to determine the best taxable position. Transferring is not necessarily a bad thing if planned ahead. Simple things like delaying by one month can be beneficial but unfortunately this cannot be retrospectively altered.

Please consider getting proper advice; “stitch in time…”

 

[Ivy j]

There are a number of considerations when transferring from a sole trader to a limited company including closing year rules, capital allowances, stock and losses. There are also some elections that can be made as the transfer will be between connected persons.

Stock is deemed to be transferred at market value but if between connected persons and appropriate elections made (and within time) it can be the higher of the cost to trader or price paid by the new company. This can have the effect of shifting profit between tradership and company so timing and relevant rates of tax should also be considered.

Whilst it is not the easiest of reads the rules are found in the Income Tax (Trading and other income) Act 2005 s178.

It is important to treat all the individual aspects together not separately to determine the best taxable position. Transferring is not necessarily a bad thing if planned ahead. Simple things like delaying by one month can be beneficial but unfortunately this cannot be retrospectively altered.

Please consider getting proper advice; “stitch in time…”

Thank yo for the info, I am definitely finding myself an accountant As I know there is no way I will be able to figure out the corporation tax and all the other stuff along with it.