Finance Act 2013

Finance Act 2013

2013 CHAPTER 29

Introduction

Section 61: Disincorporation Relief: Effect of Disincorporation Relief

Summary

1. Section 61 amends Taxation of Capital Gains Act 1992 (TCGA 1992) and Corporation Tax Act 2009 (CTA 2009) to give effect to disincorporation relief claims. 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. The section inserts new provisions into existing legislation within Part 5 of TCGA 1992 and Part 8 CTA 2009.

3. Subsection (1) inserts new section 162B and new section 162C into TCGA 1992.

4. Subsection (1) of new section 162B provides that the section applies where a company transfers its business to its shareholders and a claim to disincorporation relief is made.

5. Subsection (2) provides that the transfer of any qualifying asset by the company is deemed to be for a consideration which is equal to the lower of the cost of the asset to the company, as determined by section 38 of TCGA 1992, and the market value of the asset.

6. Subsection (3) defines a qualifying asset as goodwill or an interest in land, other than land held as trading stock.

7. Subsection (4) excludes goodwill falling within new section 162C TCGA 1992 (post-FA 2002 goodwill) from subsection (2).

8. Subsection (1) of new section 162C TCGA 1992 provides that this section applies where a company transfers its business to its shareholders, a claim to disincorporation relief is made and any goodwill is post-FA 2002 (i.e. new section 849A CTA 2009 applies to the transfer of goodwill).

9. Subsection (2) provides that goodwill to which the section applies acquired by the shareholders from the company is acquired for a consideration equal to the transfer value determined by new section 849A CTA 2009.

10. Subsections 4(2) and 4(3) amend Chapter 13 of Part 8 CTA 2009, adding a new subsection 845(4)(e) (disincorporation relief) to the list of exceptions to the basic rule.

11. Subsection 4(4) inserts new section 849A CTA 2009 immediately after section 849 CTA 2009.

12. Subsection (1) of new section 849A provides that new section 849A CTA 2009 applies where a company transfers its business to some or all of its shareholders and a claim to disincorporation relief is made.

13. Subsection (2) provides that the transfer value of goodwill within Part 8 CTA 2009 is the lower of the tax written-down value of the goodwill or market value where the realisation of goodwill is dealt with under section 735 CTA 2009 (asset written down for tax purposes).

14. Subsection (3) provides that the transfer value of goodwill within Part 8 CTA 2009 is the lower of cost or market value where section 736 applies (asset shown in balance sheet and not written down for tax purposes).

15. Subsection (4) provides that the transfer value is nil where section 738 applies (asset not shown in balance sheet).

16. Subsection (5) provides that the tax written-down value is a reference to the tax written-down value immediately before the transfer.

17. Subsection (6) defines “the cost of the goodwill” as the cost recognised for tax purposes (sections 736(6) and (7) of CTA 2009).

18. Subsection (7) provides that the same definition of market value is to be used as that in section 845(5) of CTA 2009.

19. Subsection 4(5) of the section provides that the amendments made by this section have effect to business transfers occurring on or after 1 April 2013.

Background

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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).

26. 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.

27. 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.