Disincorporation relief – use it or lose it

Birminging Cityscape
By Philip McNeill, ICAS Head of Taxation (Tax Practice and Owner Managed Business Taxes)

12 July 2017

Disincorporation relief is due to go on 1 April 2018. Do we need to save it?

Small company and I want to get out

Disincorporation relief was introduced on 1 April 2013 to help small companies, which no longer wanted to be companies, to transfer their trade and assets to shareholder directors with minimum fuss.

Despite an estimated 610,000 companies being eligible, take-up has been very low. Why?

The 0% plumber

The 2002 Budget introduced a 0% corporation tax band. There was a predicted surge in incorporations – the archetypal small limited company ‘sole-trader’ plumber.

Did this leave a legacy of small limited companies who really didn’t want to be there, but couldn’t get out?

The Office of Tax Simplification thought so and suggested a new relief, disincorporation relief. This is enacted as s162B-C TCGA 1992 and s849A CTA 2009.

A growing problem

With changes in corporation tax rates, the small company business model has become less attractive. But disincorporation can result in significant tax liabilities. Disincorporation relief is here to help.

What disincorporation relief does

Disincorporation relief enables the shareholders of small companies to take over the assets of the company and carry on the trade as an unincorporated business, without the company suffering capital gains tax on the market-value deemed disposal of the company assets.

The relief covers, broadly, goodwill and land and buildings which are not held as trading stock.

This removes a potential tax hurdle. Incorporation becomes less of a lobster pot – easily in, but not so easily out.

Missing shareholders

What is not covered by disincorporation relief is the potential impact on shareholders of the distribution.

For higher rate taxpayers, winding up, rather than ‘disincorporation’, can bring a lower tax bill where distributions are taxed as capital.

Too little, too low

But the new relief has not met with a surge in disincorporation.

Is the £100,000 asset limit too low – remembering that this is market value, not book or transfer value?

Disincorporation relief covers the company’s tax position, not the shareholders. Does there need to be more of a tax break for shareholders?

Is the exclusion list too long – for example, would it help to include LLPs as eligible shareholders for the relief? Is the requirement for a going-concern transfer including all assets except cash, too restrictive?

A useful provision

In light of the dividend tax charges, which could soon see a reduction of the dividend allowance to £2,000, and targeted anti-avoidance rules restricting re-entry to a similar trade following a winding up, could disincorporation relief yet prove to be a useful option?

Next steps

There is still time to inform the debate as the OTS is inviting comments on the future on disincorporation relief.

Please get involved - share your views and experience.

Use it or lose it, unless a case is made to keep the relief, it will be gone by 1 April 2018.   

Contact the ICAS Tax team


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