Incorporating an existing sole trade can be done in various tax-efficient ways, such as utilising Incorporation Relief. However, when considering the interaction between existing debts, including bank loans, and Incorporation Relief, some clarification is needed.
There are different methods of incorporating a trade, including gifting, selling for consideration, or selling for shares. It is important to have proper legal advice and formal documentation, such as a deed of gift or contract for sale. In certain cases, a "de-facto" transfer may be possible, but this depends on the specific circumstances, as shown in the case of 2 Green Smile Ltd & Anor v HMRC [2023] UKFTT 15 (TC).
Under the rules of Incorporation Relief, outlined in section 162 of the Taxation of Chargeable Gains Act 1992, all business assets except cash must be transferred wholly or partly in exchange for shares. If the entire consideration is in shares, full relief is available. However, if only part of the consideration is shares, only a portion of the gain will qualify for relief.
The legislation does not explicitly address liabilities, so taking over business liabilities is typically considered non-share consideration. However, HMRC's Extra Statutory Concession D32 allows for the transfer of business liabilities to be excluded from consideration. It is important to claim this concession specifically, rather than assuming it. If the company repays or refinances the liabilities, it is not considered the same as transferring the liabilities, which adds complexity when utilising Incorporation Relief.
It's worth noting that even with full Incorporation Relief, the gain being rolled over cannot exceed the value of the shares acquired. HMRC confirms this at CG65765. To illustrate, let's consider an example where a sole trader incorporates their business, transferring goodwill of £300k and trade debts of £150k.
If HMRC's ESC D32 applies, 100% of the gain can be rolled over within Incorporation Relief. Without ESC D32, only 50% of the gain qualifies for relief. However, in both cases, the gain held over cannot exceed the value of the shares, which in this example is £150,000 (assets minus debts).
Other factors to consider in an incorporation include HP contracts or leasing agreements that may require permission for transfer and potential car benefit implications if a car is transferred to the company.
Ultimately, each incorporation should be assessed based on its specific circumstances, and it may be determined that Incorporation Relief is not the most suitable option.