Disincorporation Relief and the Reliefs for Different Losses after Company Formation UK


The disincorporation relief permits an ltd company UK in transferring of its business setup UK to any of its shareholders without the occurrence of the gains or profits that are liable to tax on buildings, lands and goodwill. A business setup UK may be in function as a company, i.e. an incorporated business or as a sole trader or partnership, i.e. an unincorporated business. Where the owners or the shareholders of an ltd company UK make a decision that they would give preference to run the business as an unincorporated business, that is, they decide to disincorporate, the company will then transfer the business to the shareholders and hence make the disposal of its capital assets. This may result in the charge of corporation tax on any profit or gain that occurs on the transferred assets. This may be treated as a disincentive to disincorporation.

The disincorporation relief permits some specific small companies to make the transfer of the business of the company to its shareholders without a charge of corporation tax that occurs while transferring the specific assets, in case some specific conditions are met.

This blog will discuss the operation of the relief, application of the disincorporation relief, claim of a relief and the reliefs for losses.

Operation of the Relief

In case of a company transferring its business to its shareholders, it is supposed to make a disposal of its assets at a market rate. Any gains chargeable on the assets like buildings and land, and profits of trading on intangible assets like goodwill, will give rise to a charge of corporation tax.

Where the claim of disincorporation relief is made, any buildings and land should be transferred at their market value’s lower and their cost of allowable acquisition, and goodwill is to be transferred at the lower of its market value and its value of written down tax. This results in the profit or gain that occurs while disposing the assets. The shareholders are supposed to acquire the assets at the same cost.

It should be noted that the disincorporation relief does not give relief for other charges of tax that may occur on transferring the business like capital allowance charges of balance or a profit on the deemed transfer of inventory or stock at a market rate. However, other reliefs may be available for these charges of tax where the shareholders and the company are the connected persons.

Where is the Disincorporation Relief Applicable?

The relief is applicable in the case when:

  • The transfer acts as a qualifying business transfer.
  • A company makes the transfer of its business to some or all of its shareholders.
  • The transfer of business takes place in the duration of April 1, 2013 and March 31, 2018.

A business will be qualified in the case when:

  • All the assets of the business except cash are transferred.
  • All the shareholders to whom the business gets transferred consist of individuals and have been holding their shares for a period of 12 months before the day it got transferred.
  • The business gets transferred in the form of a going concern.
  • The goodwill’s total market value and the cost of buildings and land that are transferred is not more than an amount of 100,000 pounds.

Making a Claim for Relief

The disincorporation relief must be claimed within the duration of 2 years after the date of transfer. The relief must be claimed in a joint form by the company and all the shareholders to whom the business gets transferred. It is of the irrevocable nature, that is, it cannot be retrieved.

Losses and their Reliefs

An important factor that is involved in the deciding the relief to claim is the marginal rate of tax that can be of the following percentages: 20 percent, 23 percent or 23.75 percent.

Losses in Trade

The compensation of the trading losses can be done by the subtraction from present sum of profits, sum of profits of periods from the past or from the future income of trade.

In a nutshell, the reliefs available for the losses of trade suffered by a company include:

  • The ability to claim the subtraction of the loss from earlier sum of profits.
  • The ability to claim the subtraction of loss from the present sum of profits.
  • Not to make any claim and send forward, the loss to be subtracted from future income of trade of the same trade, automatically.

You can also make use of these reliefs in the form of a combination. The following choices are available to the reg ltd UK company or any other type of company:

  • To do nothing, resulting in the loss to be automatically sent forward against the future profits of trade.
  • Make a claim to subtract the loss from present sum of profits, then automatically send forward any unrelieved loss that remains to be subtracted from the future profits of trade.
  • Make a claim to subtract the loss from the present sum of profits, then make a claim to carry any loss that is unused, back and subtract from the earlier sum of profits, and then automatically send forward any unrelieved loss that remains to be subtracted from the future profits of trade.

It is important to note here that the sum of profits or the total profits is gains and income before subtracting the qualifying charitable donation from them. This can result in the charitable donations to become unrelieved.

Relief of Carry Forward Loss of Trade

The losses of trade that are carried forward can only be subtracted from the upcoming profits of trade occurring from the same trade.

A company should subtract a loss of trade that is sent forward against the profits of trade from the same trade in the upcoming or future accounting periods, unless it has otherwise been relieved by claiming to subtract it from the total sum of profits. The relief is against the profits that are first available.

Loss of Trade Relief Against the Total Profits

The relief of loss by subtraction from the total sum of profits is provided prior to the qualifying charitable donations and hence the qualifying charitable donations may then be unrelieved.

The Relief of the Current Year

A reg ltd UK may make a claim to subtract a loss of trade that is suffered in an accounting period from total sum of profits. This can make the qualifying charitable donations go unrelieved because such kind of donations are subtracted from the total profits after this relief of loss in order to calculate the total profits liable to tax.

Carry Back Relief

The relief of loss by subtraction from the total sum of profits may be provided by the subtraction from the present period profits and from the profits of the period before 12 months.

In case of such a loss, it then may be carried back and subtracted from the total profits of an accounting period falling entirely or in parts within the 12 months of the beginning of the period in which the loss was suffered. Once more, this may result in the qualifying charitable donations to be unrelieved.

A claim for the relief of present period loss can be made without having to make a claim for carry back. However, in case of a loss that has to be carried back, then a claim for the relief of present period should have been made first.

Any evident relief of loss claim for the period of the loss must be made prior to any excessive loss being carried back to a preceding period.

Any kind of carry back is to more recent periods prior to earlier periods. Relief for the losses that occurred earlier is provided before relief for the later losses.

Any loss that remains unrelieved after any claims of loss relief against total sum of profits is automatically carried forward in order to be subtracted from the future profits of the same trade.

If a period falls in parts outside of the prior 12 months, the loss relief is then restrained to the part of the profits of period (prior to qualifying charitable donations) equivalent to the part of the period that falls within those 12 months.

Time to Claim for Relief

A claim for relief by the subtraction from the present or the earlier period total sum of profits should be made within the duration of 2 years of the termination of the accounting period in which the loss occurred. Any claim should be for the entire or the whole loss (to the extent that there is an availability of the profits to relieve it). However, the loss can be decremented by not making a claim for full capital allowances, so that higher capital allowances are provided on higher values of written down tax in the coming or the future years.

A loss of trade carried back is relieved once any losses of trade brought forward have been offset.

Relief of Terminal Trade Loss

The losses of trade in the duration of the last 12 months of trade can be carried back and subtracted from the total sum of profits of the preceding 3 years.

In the case of the losses of trade suffered in the 12 months till the termination of the trade, the carry back period is then subject to an extension from 12 months to 3 years, later years being on the priority.

Making a Choice of the Reliefs of Loss and other Points of Planning

While making a selection of a relief of loss, the first consideration must be the rate at which the relief is acquired and next, the timing of the relief.

Making a Choice

There can be an availability of numerous reliefs of loss. While making a choice, consider the following factors:

  • How fast the relief will be acquired, that is, the relief of loss against the total sum of profits is more fast than carry forward relief of loss
  • The rate at which the relief will be acquired
  • The extent to which the relief for qualifying charitable donations might be lost

Other Points of Tax Planning

A company having losses must take into account claiming less than the maximum amount of capital allowances that are available. This may result in the written down tax to be higher value to carry forward and hence higher capital allowances in the coming or the future years.

Decrementing the capital allowances in the present period results in the reduction of the available loss for relief against the total profits. As this relief, if at all claimed, should be for all of a loss available, a decremented capital allowance claim could prove beneficial where all of a loss would be relieved at a low rate of tax in the present or the preceding period than the effective rate of relief for the capital allowances that will be in the coming or the future periods.

Other Types of Losses

The capital losses can only be set against capital gains in the present or the future accounting periods.

Capital losses can be set against only capital gains in the same or the coming accounting periods, not against income. The capital losses should be set against the gains first available and cannot be carried back.

Losses of Property Business

The losses of property business are set off first against the total sum of profits in the present period and then carried forward against the coming or future total sum of profits.

Property business losses are first subtracted from the total profits of the company of the present accounting period. Then, any excess is either carried forward to the next accounting period and considered as loss made by the company in that period or available for surrender in the form of a group relief.

Comments: Leave Comment

* The email will not be published on the website.