So, you incorporated your business. You got the “Ltd” after your name, felt very official, maybe even treated yourself to a new logo. But now? Now you’re wondering if all that Companies House paperwork is really worth it.
Good news: just as you can turn a sole trader business into a limited company, you can go the other way too. In tax jargon, this is called disincorporation – and yes, it’s a real word.
What actually is disincorporation?
Disincorporation is when you transfer the business and assets out of your limited company and into your own hands (or into a partnership). The shareholders then continue to run the business directly, as a sole trader or partnership.
This also applies if you’re using a company for charitable or other not-for-profit purposes. The same principles apply.
Once the business is no longer run by the company, you have two main options:
- Close the company: either through striking off or members’ voluntary liquidation
- Keep the company: either making it dormant or using it for other purposes
Here’s the thing: the company and its owners are separate legal entities. Meaning, when assets move from one to the other during disincorporation, HMRC pays close attention.
| Need help? We recommend getting professional advice, especially if the company has significant assets or is registered for VAT or PAYE. Get in touch, and we can help with the decision-making process as well as the disincorporation itself. |
Tax implications for the company
Corporation Tax
Whether you close or keep the company affects how Corporation Tax applies.
If you keep the company, you may still need to file a Corporation Tax return, even if the company is dormant. HMRC may request one, and Companies House will always require accounts.
If you close the company, it will no longer exist as a legal entity. Before you do this, make sure the company has met all its Corporation Tax obligations. Tie up those loose ends first.
Transfer of assets
When you go through disincorporation, you’ll need to transfer the company’s assets to yourself and any other shareholders. Assets can include:
- Stock
- Land and property
- Vehicles
- Goodwill
- Debtors
To work out if any Corporation Tax is due on the transfer, you need to know what the assets are worth at the point of transfer. You may need professional help valuing them (hello folks at JVCA). Companies pay Corporation Tax on gains (not Capital Gains Tax – that’s for individuals).
Here’s the key bit: even if the company gives assets away for free, it must treat the transfer as if it were made at market value on the date of transfer. Market value means what the company would get if it sold the asset to an unrelated party.
For example, if the company gives an asset worth £1,000 to its shareholder for nothing, it still calculates the gain as if it sold that asset for £1,000.
Trading losses
Bad news here: Corporation Tax losses cannot be transferred to the individuals taking over the business. You’ll be paying Income Tax going forward, not Corporation Tax, so the losses simply can’t follow you. Any losses the company can’t use will be lost when the business transfers.
However, there is one lifeline. The company may be able to claim Terminal Loss Relief. This allows trading losses from the final 12 months of trading to be carried back and offset against profits from the previous three years. Worth looking into.
PAYE
If the company is registered for PAYE, you’ll need to deal with that too. Check out HMRC’s guidance on what to do if your business merges or changes ownership.
VAT
This section only applies if the company is VAT registered.
VAT is not chargeable when a business is transferred as a going concern. For the transfer of a business as a going concern rules to apply, certain conditions must be met, so check you qualify.
If you’re moving the business from a limited company to a sole trader or partnership, you may need to transfer the VAT registration due to the change in legal status. Alternatively, you can cancel the existing VAT registration and register for VAT again under the new structure.
Tax implications for the shareholders
Income Tax or Capital Gains Tax?
You may be liable to Income Tax or Capital Gains Tax on distributions paid to you by the company during disincorporation. Which one depends on whether and how the company is closed.
A distribution is a payment made by a company to its shareholders (or someone connected to them, like a family member). It includes dividends, as well as transactions such as the company transferring an asset to a shareholder.
If the company is NOT closed (for example, it’s kept dormant or used for other purposes), distributions you receive will normally be treated as income. Meaning, you’ll pay Income Tax on them.
If the company IS closed, the tax treatment depends on how it’s closed:
- Members’ voluntary liquidation: This is a formal process where a licensed insolvency practitioner winds up the company and distributes its assets. Distributions you receive will normally be treated as capital distributions, and you’ll pay Capital Gains Tax.
- Voluntary striking off: This is where you close the company by getting it struck off the Companies Register. Distributions you receive before the company is struck off will normally be treated as income, and you’ll pay Income Tax.
Anti-avoidance rules (the bit HMRC really cares about)
There are special rules designed to stop people gaming the system, particularly where a company is wound up or enters into transactions with a main purpose of reducing someone’s Income Tax liability.
These include:
- Anti-avoidance rules for winding up: these apply to distributions made during a members’ voluntary liquidation where the individual continues to carry on the same or similar trade.
- Anti-avoidance rules for striking off: these apply to distributions made before a company is struck off.
- Transactions in securities legislation: this can apply in both situations
If any of these rules apply, your distributions may be treated as income for Income Tax purposes (even if you thought you were getting capital treatment).
JVCA tip: Not sure whether these rules apply to you? You can make a statutory clearance application to get certainty before you proceed.
Stamp Duty Land Tax, Stamp Duty and Stamp Duty Reserve Tax
Nearly there. A few more taxes to consider.
When a company transfers land to its shareholders, Stamp Duty Land Tax (SDLT) may be payable by the shareholders on the chargeable consideration.
When a company transfers shares it holds in other companies to its shareholders, Stamp Duty or Stamp Duty Reserve Tax (SDRT) may apply. However, shareholders don’t need to pay Stamp Duty or SDRT on shares given to them for nothing (unless the shares are listed and the market value rule applies).
So…should you do it?
Disincorporation isn’t for everyone, but it can make sense if your business has simplified, your profits are lower, or you just want less admin in your life. The key is getting the tax treatment right, and that means…drum roll please…planning ahead with a professional.
| Thinking about disincorporation? Don’t go it alone! Get in touch, and we’ll help you work out whether it’s the right move and how to do it without any nasty tax surprises. |
