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Sam
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Category: Tax
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Thanks - what do you think is the most tax efficient way to

Customer Question

thanks - what do you think is the most tax efficient way to incorporate the sole trade - it has net assets of £59,000 in the sole trade, offset by a £58,000 loan from my father who is never going to ask for the money back - so is it better to incorporate the assets excluding the loan, and hold as a directors loan balance to draw against or also to include the loan....assuming incorporate the assets can I claim Ers relief on the Capital Gain at 10%?
Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.
Hi
Thanks for your question and asking for me.
If the loan is never going to be asked for back - then its not a loss to the company. So is no longer a loan - so this has no bearing on the fact you wish to now become a limited company. So does not require any consideration regarding a directors loan for this or the assets.
The assets can only be valued at todays date - to establish any capital allowance or balancing charge to finalise the sole trader accounts, and then that value must be paid (or established) from the limited company to create the capital allowance position on assets acquired.
And no you cannot claim entrepreneurs relief on the assets as these fall under the capital allowance regime - not capital gain regime.
You seem to be mixing your taxes up! As you seem to suggest these are machinery and plant - please advsie if this is NOT the case.
A gain would arise should there be a sale of a true assets such as a building etc
I am not even sure why you are becoming a limited company, if you are making losses as whilst there may be some tax savings to be had through a limited company - the additional admin work and tax requirements, if using an accountant, more than wipe out those savings - so do think carefully - it may not be as efficient as you have been led to believe.
Thanks
Sam
Customer: replied 1 year ago.

Thanks Sam - yes I am getting a little mixed up as the assets being transferred to the company are £166k of plant and machinery that are financed with £100k of hire purchase, and then a bank overdraft of £15k 25k of debtors and some other minor balances that make up an overall net asset position of £59k - the sole trade has always been very distinct and separate with its own balance sheet so these assets/liabilities are purely business related - so all I want to do is transfer the assets into a company both plant, debtors, creditors, and the HP loan balance

thanks

Expert:  Sam replied 1 year ago.
Hi
Thanks for your response
So its nothing to be with capital gains at all
With the business assets - as I have advised then (to recap)
The assets can only be valued at todays date - to establish any capital allowance or balancing charge to finalise the sole trader accounts, and then that value must be paid (or established) from the limited company to create the capital allowance position on assets acquired.
The debts are lost with the sole trader as is the bank overdraft as these have no bearing on the limited company - (and usually would be reflected in the sale of the business - which is not the case here - so are lost)
Same with creditors - these must be paid to the sole tradership and any old debts also pursued and finalised within the sole tradership.(as the sole trader and the limited company are two entirely different legal status establishments)
Same with HP loan balance this cannot be transferred - you will need to pay this off or renegotiate it with the HP companies with a new finance arrangement under the new business entity.
Thanks
Sam
Customer: replied 1 year ago.

Thanks - so when I incorporate a sole trade, can I not just sell all the assets and liabilities to the company then?

Expert:  Sam replied 1 year ago.
Hi
You can sell the assets but not the liabilities - (who would pay for a debt? If this was a true sale to a third party you would incorporate your loss and debts within the sale price) but you are not actually selling/exchanging money for this change of ownership)
And I have advised on the assets
The assets can only be valued at todays date - to establish any capital allowance or balancing charge to finalise the sole trader accounts, and then that value must be paid (or established) from the limited company to create the capital allowance position on assets acquired.
So if they are sold from the sole trader with the value of £166K market value (although I suspect his was what you purchased for and the second hand value is far less) so say this is £82K
Then you compare this for the sole tradership with the value carried forward under the capital allowance regime - if the value is MORE than you add back in a balancing charge to the final year of the sole tradership. If its LESS then you have a furtehr capital allowance to claim against the sole trader ship.
Then for the limited company - you bring in the value of £82K as a start point with the plant and machinery - and then can claim capital allowances each year from this value.
Thanks
Sam
Customer: replied 1 year ago.

Hi - what about a joint election under s266 to transfer the plant and machinery at tax wdv would that work and avoid the balancing charges?

thanks

Expert:  Sam replied 1 year ago.
Hi
Thanks for your further question
Yes it would but it also would mean that the transfer of the asset is treated as NIL when brought into the limited company - for capital allowance purposes.
Let me know if I can be of any further assistance
Thanks
Sam
Customer: replied 1 year ago.

thats great thanks - reading the HMRC guidance it would appear yo can make the election and in this instance the sale or transfer price is ignored...so technically you can transfer the plant and machiner over for £166k which would sit on the Directors Loan account as a credit, but the tax wdv would be zero (which is the case here as AIAs have been claimed previously)...Appreciate you get a charge if you sell assets - but they normally swap out with new ones....you could then I assume draw funds against the DLA to settle the personal HP liabilities held correct and as you say pay them off

if you can confirm thats a fair interpretation I would be very grateful thanks for all your help

Expert:  Sam replied 1 year ago.
Hi
Making an election does NOT create a credit in the directors loan account - as the election renders the transfer as NIL left from the sole trader and a NIL position into the limited company (SO ALLOWS THE ACTUAL CAPITAL ALLOWANCE VALUE BROUGHT FORWARD INTO THE LAST YEAR OF TRADING TO BE THE VALUE CARRIED INTO THE LIMITED COMPANY)
But this is then amounts allowed against the future limited company profits as continuing capital allowances (writing down value) and has NOTHING to do with the directors loan account as already advised.
See link here from Capital Allowance manual http://www.hmrc.gov.uk/manuals/camanual/CA29040.htm (this highlights change from sole trader to partnership but runs on the same premise)
I do not know where you get the idea that you can use this value to open up a credit in the directors loan account and draw on it ???? This is NOT correct
Thanks
Sam
Customer: replied 1 year ago.

The reason I asked is because the guidance says "When an election is made any sale or transfer price is ignored"

My point being there are two values here - one is the tax written down value for capital allowance purposes which is zero...and one is the actual sale price....

so yes I appreciate from a capital allowance perspective the WDV pool is zero, but why not then sell the assets at market value eg the £166k and make the election from a tax perspective of zero? - the accounts would then show fixed assets of £166k and a DLA of £166k credit as the sale of assets. The WDV would be zero as per the election

While I am an accountant, I don't deal in tax matters hence why I use this site to ask questions as and when they arise on personal issues or from friends - I apologise for the basicness of the questions..but thats what I pay my subscription for....and when I do ask questions I do like to know the reasoning behind the answers. My whole premise behind my questioning is that I want to incorporate business assets and liabilities in total with the exception of a car, and there must be a way of doing this - thanks Craig

Expert:  Sam replied 1 year ago.
Hi
Thanks for your response
Yes its ignored in so far as the transfer allows the asset to be transferred at the current value (as if it had been purchased from day 1 and had all the benefits of the capital allowances or annual investment allowances.
It means you do not have to concern yourself with balancing charges on the sole trader side of things, but just carry the value over from the sole trader. Obviously had you claimed all the value under annual investment allowances, then the value for the limited company would be NIL for capital allowance purposes.
But this is a value for the balance sheet (keeps a record of assets values) and if there are nay available- writing down allowances for capital allowance purposes.
BUT this has NOTHING to do with directors loans -a credit on this would arise, for example if you injected money into the account (of your won) and this would create a credit in the account - on which you could draw on without any tax consequence.
You seem to be mixing up the general assets balance sheet with the directors loan, and your questions are not basic but very complex and without any real understanding of how limited companies operate for tax purposes, and do not seem to grasp the terminology even though I do feel (I hope) am offering a full and simple explanation each time in response to your new post.
I would also like to point out that the amount offered (through your subscription) for this question is very low when compared to the length of time this initial simple post seemed to suggest and has gone beyond lack of understanding of tax regimes and now is lack of understanding on operational limited companies.
The point of this site is to offer information/direction on topics rather than full tax guidance - and this is now straying very much into the need to educate you on the whole position - which I am sure you can appreciate is more than we are permitted to provide.
My honest (and expert) advise is that you should stay as a sole trader as unless you have full representation from the local accountant to manage your tax obligations, I fear that you will end up creating avoidable issues.
And in answer to your final point where you ask
I want to incorporate business assets and liabilities in total with the exception of a car, and there must be a way of doing this
You CANNOT bring liabilities into the limited company - they sit and remind with the sole trader - and with the assets you either make the election - which allows the same value of outstanding value of capital allowance into the limited company under the S266 claim OR you clear the assets with a balancing charge/capital allowance write off, and then "sell" the assets to the limited company - so that the value can be brought into the limited company.
However IF you have sued all the capital allowance in the sole trader - and the value to bring forward for the assets is NIL then you will have a full balancing charge against the sole trader, which INCREASES your profits - and its then that the S266 is preferable.
Thanks
Sam

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