Finance Act 2013

Finance Act 2013

2013 CHAPTER 29

Introduction

Section 58: Disincorporation Relief

Summary

1. Section 58 introduces legislation to allow a company to claim disincorporation relief. Disincorporation relief allows a company to transfer goodwill and interests in land to its shareholders so that no corporation tax charge arises to the company on the transfer.

Details of the Section

2. Subsection (1) limits the circumstances when a claim for disincorporation relief may be made. It limits claims to transfers of a business from a company to some or all of its shareholders provided that the transfer is a qualifying business transfer (as defined in section 2) and it takes place within the 5 year period starting on 1 April 2013.

3. Subsection (2) explains that the consequences of a claim are set out in new sections 162B and 162C of the Taxation of Chargeable Gains Act (TCGA 1992) and new section 849A of the Corporation Tax Act (CTA 2009).

4. Subsection (3) defines the term “the business transfer date” as the date on which the business was actually transferred unless transferred under a contract.

5. Where the business is transferred under a contract subsection (3)(a) uses the same rule as in section 28 of TCGA 1992 to determine the time of the transfer i.e. if the contract is unconditional the time of the transfer is the date the contract was agreed and if it is conditional the time of the transfer is the date on which the contract became unconditional.

6. Subsection (3)(b) provides for situations where a business is transferred under more than one contract and provides that the contract that transfers the goodwill of the business is the relevant contract to determine the business transfer date.

7. Subsection (4) provides that disincorporation relief will apply to business transfers occurring on or after 1 April 2013.

Background

8. In February 2012 the independent Office of Tax Simplification (OTS) published its final reports into small business tax. One of these reports identified a population of businesses operating as limited companies which would prefer to operate in unincorporated form and highlighted a number of tax charges and administrative issues that might currently discourage this.

9. At Budget 2012 the Government announced a consultation on the OTS proposals for a disincorporation relief. That consultation closed on 30 August 2012. The Government has considered all the responses to the consultation and will publish a summary of the responses on 11 December 2012.

10. Disincorporation relief responds to proposals made by the OTS, which recommended that a relief be introduced to remove the tax barriers that currently exist when business assets are transferred by a company to its shareholders who wish to continue the business as a going concern in an unincorporated form.

11. The current legislation requires a company to pay corporation tax under the Taxation of Chargeable Gains Act 1992 when chargeable gains arise on disposals of assets, and corporation tax under the intangible fixed assets rules at Part 8 of the Corporation Tax Act 2009 when credits arise from a realisation of goodwill, based on the market value of the asset at the time of the transfer.

12. Legislation will be introduced in the Finance Act with effect from 1 April 2013, to allow a company to transfer qualifying assets (land and goodwill used in the business) to shareholders as individuals who wish to continue the businesses in an unincorporated form. The relief will allow qualifying business assets to transfer at a reduced value for corporation tax.

13. Claims will be restricted to those businesses where the market value of the classes of qualifying assets does not exceed £100,000 and the relief will be available for a period of 5 years commencing from 1 April 2013 (subject to Royal Assent).

14. Joint claims must be made in writing to HMRC by the company and the shareholders who wish to continue the business within two years of the date of the transfer of qualifying assets. Other eligibility criteria will also apply. HMRC will publish guidance on what information will need to be included in the claim.

15. Disincorporation relief does not cover the tax charges that might arise to the shareholders when assets are distributed below market value in the course of a disincorporation.