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I wonder if you could help me - I'm after some advice on capital gains tax.
Me and my wife were in a partnership until 1st of July last 2012. We then formed a limited company and sold all of the partnership assets to it.
The sale price was made of goodwill, website and also fixed assets and stock (£31K, £6K, £7.2K, £2.2K respectively). I would like to clarify which parts of the total price can be subject to capital gain and which can be under entrepreneur relief and taxed @10% ?
Also, as we withdraw money from the company I wonder if we can be treating that money as company paying back the sale price, rather than dividends until the full amount will be paid back? If that's possible - will it be from company's profits or will that be a cost to the company and lowering it's tax liability?
Hi.You may not have heard of incorporation relief so you should read the HMRC helpsheet HS276. Basically, you can exchange the business assets apart from cash for shares in your new company effectively deferring any CGT liability until you sell the shares in the company. Incorporation Relief is given by default so if you don't want it to apply, you need to elect for it not to apply by the third 31 January after the end of the tax year in which the exchange of business assets for shares took place.Since you appear to have sold the business assets for cash as opposed to shares in the new company and that cash is sitting as a notional credit in your directors loan accounts in the company, then incorporation relief won't apply. Provided you and your partnership business meet the qualifying criteria for entrepreneurs' relief to apply as set out in the HMRC helpsheet HS275 , it can be used against the gain on the goodwill and the website though I'm not sure how you would value that. Fixed assets (unless they are buildings) and stock are treated as having been sold at their written down value and cost respectively. Since the company won't have had the cash to pay you for the business assets at the time of the sale, you can draw funds tax free as and when cash flow allows as you will already have disclosed the gain and paid CGT. However, you might also consider dividends and salary (to use personal allowances) if you have no other income sources and would be basic rate taxpayers in the early years so that the business sale proceeds can be drawn when and if you are higher rate taxpayers.The sum paid by the company for the goodwill can be amortised (written off and claimed as an expense) over a reasonable period so long as it was created by your partnership business after 1 April 2002 or if it existed before 1 April 2002, it was bought from an unrelated party after 1 April 2002. Take a look here and here for more information on amortisation of goodwill.I hope this helps but let me know if you have any further questions.
The HS275 helpsheet gives you the ER criteria. Basically, most trading businesses that don't have as their main source of income the letting of property qualify. That is something of a generalisation I have to say.I'm not an expert on business valuation nor do I have access to your books so I cannot comment on your figures.The easiest way to transfer the equipment is to withdraw it from the partnership at its written down value and introduce it into the limited company at the same value. Your accountant will be able to do that. You should withdraw the equipment you are keeping personally at its market value so there may be a balancing charge in the capital allowances computation. You cannot get more than the net cost of an asset in capital allowances. So, if your camera cost £1,500, its written down value is £750 and it is worth £900, there will be a clawback of £150 in capital allowances in you final partnership tax calculation.As for the amortisation of goodwill, though you are connected to the partnership and the limited company, provided the original business commenced after 1 April 2002 you can claim amortisation relief which means you can write off the goodwill over a number of years. Take a look under the heading "A typical scenario" here for an example and here for some more information. Unless you can come up with an argument for the tax office to write it off over a shorter period, they will allow you to do so at 4% per annum.
How can it if you have made a loss according to your accountant? You get capital allowances on fixed assets which write down the cost to £0 over a number of years.
Why would they be taxed again? You haven't paid tax on the assets once, let alone a second time.Let me give you an example:I buy a piece of equipment for my business for £10,000. I claim capital allowances on it over several years totalling £6,000. That leaves unrelieved expenditure of £4,000. If I dispose of the asset either to a third party or my company for £3,000, my net cost is £7,000 (£10,000 - £3,000). As I have already had capital allowances of £6,000, I am entitled to a balancing allowance (a deduction from my trading profit) of £1,000 (£10,000 - £3,000 - £6,000). You never get more allowances than the net cost of an asset.
The buyer of the asset introduces that asset into their business at a cost £3,000 and they can claim capital allowances up to £3,000.
If I had sold the asset for £5,000, my net cost is £5,000 (£10,000 - £5,000). I've had allowances of £6,000 so there is a balancing charge (an addition to my trading profit) of £1,000 (£6,000 - £5,000).If you sell a fixed asset for more than it cost to buy then you may have Capital Gains Tax to pay if your total gains in a tax year exceed £10,900.