Business tax – guidance

Corporation Tax: Disincorporation Relief

How to claim relief on the transfer of assets when your company changes from a private limited company to a sole trader or partnership owned business.

Overview

Disincorporation Relief allows a company to transfer certain types of assets to its shareholders (who continue to operate the business in an unincorporated form) without the company incurring a Corporation Tax charge on the disposal of the assets.

How Disincorporation Relief works

Transfers of assets between a company and its shareholders are normally transfers between connected persons or related parties.

Usually transfers between connected persons or related parties are treated as taking place at market value for tax purposes - the result being that the transfer is taxed on the market value of the asset regardless of the amount paid by either party. This could result in the company having to pay a Corporation Tax charge in cases where the market value of the asset is more than its original cost or its tax written down value.

A claim to Disincorporation Relief allows qualifying assets to be transferred below market value so that no Corporation Tax charge arises to the company. The shareholders accept the reduced transfer value for all future capital gains computations.

Qualifying transfer

The business transfer by the company will be a ‘qualifying transfer’ for the purposes of Disincorporation Relief if it meets all of the following conditions:

  • the business must be transferred as a going concern
  • the business must be transferred together with all the assets of the business or together with all the assets of the business apart from cash
  • the total market value of the qualifying assets at the time of the transfer must not be more than £100,000
  • the shareholders that the business is transferred to must be individuals
  • those shareholders must have held shares in the company throughout the 12 months before the transfer

Qualifying assets are interest in land (other than land held as trading stock) and goodwill (ie the reputation of the business).

Read the detailed guidance on goodwill if your company has goodwill relating to a business that started on or after 1 April 2002, or you acquired goodwill from an unrelated party on or after 1 April 2002.

Eligibility

A company and its shareholders can make a joint claim for Disincorporation Relief if:

  • the company transfers its business to some or all of its shareholders
  • the transfer is a ‘qualifying transfer’
  • the transfer occurs between 1 April 2013 and 31 March 2018

The business transfer date is normally the date on which the business is transferred but this can be different where the business is transferred under contract.

The business can be transferred to individuals who are in partnership but not to members of a limited liability partnership. They must continue to run the business after the transfer.

Other taxes

Shareholders may still be liable to Income Tax or Capital Gains Tax on the transfer of assets to them by the company. Shareholders may also be liable to Capital Gains Tax if they dispose of the assets at a future date.

You can read detailed guidance and examples on how the relief works in the Capital Gains Manual.

Claim Disincorporation Relief

Disincorporation relief must be claimed jointly by the company and all shareholders receiving assets. Claims must be made within 2 years of the transfer date but can’t be made if the company has already closed down (struck off or wound up). Once a valid claim to Disincorporation Relief is made it can’t be withdrawn.

The transfer values apply to transferor and transferee. If you’re a transferee shareholder you must use the transfer value as the cost of the asset in calculating your Capital Gains Tax on any later disposal.

Where the company is required to complete a Company Tax Return, claims should be made as part of the Company Tax Return for the period in which the business is transferred.

If you’re making a claim as part of the online filing process you should complete the Disincorporation Relief claim form and attach it to your Company Tax Return.

If you haven’t received a notice to file or you wish to amend your Company Tax Return, to claim Disincorporation Relief you can either:

If you choose to write to Corporation Tax Services your letter must include:

  • the name, address, Unique Taxpayer Reference and company registration number of the company
  • the name, address, Unique Taxpayer Reference (if available) and National Insurance number of each shareholder to whom the business has been transferred
  • the transfer value of each qualifying asset for each shareholder to whom the business has been transferred
  • the date of the business transfer
  • a declaration that the business has been transferred with all its assets, or with all of its assets apart from cash