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TaxationWeb by Mark McLaughlin ATII TEP

Following Budget 2002, there has perhaps never been a better time for sole traders and partnerships to incorporate their business. Mark McLaughlin, an associate at Forbes Dawson, considers the tax planning opportunities available.Following the changes in Budget 2002, there has perhaps never been a better time for sole traders and partnerships to incorporate their business.

Incorporation now gives rise to a number of planning opportunities, including the following:

• Transfers of goodwill are exempted from stamp duty. Previously, the disposal of goodwill to a company (other than by a gift) could attract a stamp duty liability of between 1 and 4%.

• The reduction in the taper relief holding period for business assets to 2 years as announced in Budget 2002 means that (for example) a sole trader can sell substantial business goodwill at an effective CGT rate of only 10%, and with no stamp duty charge.

• “Incorporation Relief” (TCGA 1992 Section 162), which applies when business assets are exchanged for shares was previously an automatic relief. However, the individual can now elect to disapply these provisions. This will be beneficial for CGT purposes in certain situations, such as where the company shares are sold shortly after the business has been incorporated.

• Company profits are taxable at lower rates than the 40% higher rate of personal tax. These profits can be retained and used in the company’s business until it is sold or wound up, at an effective rate upon exit of only 27% for a small company and higher rate tax payer.

• Alternatively, company profits can be paid to the business owner as dividends, which, unlikely salary, do not attract NIC. Dividends become an increasingly attractive form of profit extraction bearing in mind the proposed NIC increases from April 2003.

The last two points equally apply to existing companies. The NIC increases in particular make remuneration planning more important for those clients.

The government also announced in Budget 2002 that Companies can now claim tax relief for purchased goodwill. It is unfortunate (but not perhaps surprising) that this relief has not been extended to goodwill acquired from ‘connected persons’, i.e. the business owner. Nevertheless, there are enough potential advantages already to make incorporation an attractive proposition.

Further Information

To discuss the tax planning opportunities available and for advice on incorporating the business, please contact Mark McLaughlin at Forbes Dawson on 0161 245 1090 or by email @ mark@forbesdawson.co.uk.