Disappointment at disappearance of Disincorporation Relief

The Chartered Institute of Taxation (CIOT) has expressed disappointment at today’s announcement that Disincorporation Relief will not be extended beyond its current March 2018 expiry date.1

The relief was created to address the problems faced by some small businesses that have chosen to be a limited company in the past and want to return to a simpler legal form, be it a sole trader or a partnership or a limited liability partnership.2

While there has been a very low take up of Disincorporation Relief since it was introduced in 2013 (fewer than 50 claims had been made as of March 2016) the CIOT has suggested3 that the relief might be more popular if it was broader.4

John Cullinane, CIOT Tax Policy Director, said:

“It’s a shame the Government are letting this relief lapse.

“Rather than letting this happen, the Government should have searched for a solution that fits into an overall government strategy for the taxation of small businesses – and one that addresses the differences between the taxation of different types of income, and between incorporated and unincorporated businesses. There would be wider benefits for the Exchequer if the tax benefits of being incorporated diminished. In that scenario, many smaller companies might look to disincorporate and return to sole trader status in order to simplify their affairs.

“We hope that the Government will keep this area under review. A broader relief with some anti-avoidance provisions might play a sensible part in a more rational overall system which tries to reverse the current tax incentive for businesses to incorporate.”

Notes for editors

1.       Unusually the relief has a ‘sunset clause’ applying to it which means it applies to disincorporations within the period of five years beginning on 1 April 2013 and ending on the ‘sunset date’ of 31 March 2018.

The process by which a business is transferred out of a limited company and carried on subsequently by a sole trader, a partnership or a limited liability partnership is commonly referred to as disincorporation. Disincorporation Relief allows a company to transfer certain types of assets (company assets such as land and buildings, goodwill and other intangible assets) to its shareholders (who continue to operate the business in an unincorporated form) without the company incurring a corporation tax charge on the disposal of the assets. However, the tax charges on the individual shareholders are unrelieved (normally capital gains tax when the company’s assets are distributed to them on liquidation). The relief is limited to businesses with qualifying assets valued at less than £100,000 at the time of the transfer.

See CIOT submission here. 

The relief has just a £100,000 limit. Another reason that the relief has not been widely used is because it does not go far enough in relieving tax charges. Company incorporations can be undertaken with no tax burden, but tax charges remain on disincorporation in respect of the individual shareholders.

Contact: George Crozier, Head of External Relations, gcrozier@tax.org.uk / 0207 340 0569 (Out of hours contact: 07740 477 374)