Incorporation - Is it still worth it?

Incorporation - Is it still worth it?

Incorporation - Is it still worth it?

Last December's Autumn Statement contained unexpected changes in relation to the incorporation of businesses.

What has changed?

Traditionally, when a sole trader or partnership incorporated they were entitled to incorporation relief on what was effectively a ‘disposal’ of their business.  This meant that no Capital Gains Tax (CGT) was payable on this transfer and the value was rolled into the new company. 

However, in many cases it was more tax efficient for the taxpayer to choose not to take the relief and pay CGT at a rate of 10% of the value of the goodwill of the business being incorporated.  The reasoning for this was:

•    The value would be ‘credited’ to the directors/shareholders of the new company and would be available to draw down as a loan tax free in future.

•    The goodwill could be amortised in the company, meaning that a corporation tax deduction was available for the newly incorporated business, on the depletion of this value.

Both aspects put the owners of newly incorporated businesses at a tax advantage, and as a consequence have now been removed, with effect from 3 December 2014.

The future for incorporation

It is worth bearing in mind that whilst the ability to value goodwill and use it to gain a tax advantage in a newly incorporated business was a massive boon for taxpayers, there are still many tax and other benefits of incorporating a business:

•    Tax rates within the company and extraction rates are significantly lower;

•    No Class 2 or Class 4 NIC’s are payable by the company or shareholders;

•    Asset protection and limiting liability;

•    Flexibility in terms of extraction, succession and future plans.Therefore incorporation remains to be tax efficient planning, it’s just not quite as good as it used to be.

If you would like to discuss any of these matters or talk to us about your tax affairs in general, please contact our Tax Partner, Chris Barrington on the details below:

Chris Barrington 
telephone: 01942 292505