If you want to transfer property from a sole trader to a limited company, you are legally moving the asset into the new company, usually at market value for Capital Gains Tax and Stamp Duty Land Tax purposes, with potential reliefs available if the conditions are met. As a successful entrepreneur, you will most likely come to the decision phase wherein you will need to change from a sole trader to a limited company, and that makes the transfer of business property and other assets a key part of the process. Our article ‘Sole trader to a limited company – How to make the transition‘ is a thorough step-by-step guide to working through this transition.
The strategic and practical help received from an accountant would be prudent at this time. For sole traders and business owners planning incorporation, this guide explains why assets are transferred, which assets are involved including property and goodwill, how valuation works, the tax position for Capital Gains Tax, Stamp Duty and VAT, and the wider strategic points that can affect liability, structure and the long-term efficiency of the business transfer. Here is what you need to know:
Why do you need to transfer property from a sole trader business to a limited company?
Changing to a limited company is also called ‘incorporating a business’. It basically means you are turning your sole proprietorship into a company that is formally recognised by your state of incorporation. By incorporating a company you turn it into its own legal business entity and it is clearly set apart from the individuals who founded the business. That is the key phrase: set apart.
Better credibility
Through this structure transfer, the owner, or owners, of the business create a separate legal entity that will conduct business and be responsible for actions made in its name. This new limited liability company (LLC) (also called a business entity corporation) changes how the business is viewed and treated through the eyes of the law. On the soft benefits side, it gives the business and brand more gravitas and credibility with the marketplace, with vendors, and with talent pools.
Limiting your personal liability
The biggest benefit of moving to a limited company structure is its limited liability protection; by incorporating your business, you are limiting your personal liability. As an entrepreneur, you will have invested a lot of precious capital into your startup, from launch to teething problems and the general running of the business. You would have been personally liable for debts, litigious actions, and all losses that occurred along the way.
Now that you are incorporating the business, you can expect to mostly only be liable for the capital amount that you have personally invested. Your risk is usually limited to your initial investment, although directors remain legally responsible for managing the company and you need at least one director. As you are no longer the trading legal entity, your personal assets cannot be easily used to satisfy the debts and litigious actions against your business!
This is one of the reasons why you need to make a clear separation of personal assets and business assets. Learn more about the differences between a sole trader business and a limited company in our article ‘What’s the difference between a sole trader and a limited company?’
Read on to learn the steps you need to take to start the asset transfer to your new limited company.
What is an asset?
An asset is described in tax and finance literature as a property of any nature. It can be movable or immovable, and it can be corporeal or incorporeal, including intellectual property. The definition excludes currency, but includes a right or an interest of any nature to or in the abovementioned property. Some expensive assets or complex intellectual property may need a professional valuation.
When you transfer assets, there are tax considerations and tax implications to review, so obtaining a professional valuation of the property is essential for tax calculations.
Goodwill as an asset
If your sole trader company has goodwill, it is generally expected that you will transfer the goodwill to the newly incorporated company during this business structure transfer phase. Once you have decided to do that, the next step is to evaluate it before the transfer. This is where the much-referred-to accountant will be beneficial.
If you have never considered your business’s goodwill value, nor have previously recorded it on the business balance sheet, it does not mean it doesn’t exist. There are instances wherein some businesses will not be able to assign a value to their goodwill:
If your business has been closely linked to a property. An example of this scenario would be that of a hotel, a frail care home, or playschool/kindergarten. In this instance, the goodwill may be considered part of the building as you might not be able to sell the business without the building. The goodwill, therefore, cannot be separated from the property.
If your business has been intricately linked to the expertise of an individual. An example of this scenario would be that of a personal service company, an actor/musician, a hairdresser, or a makeup artist business. The goodwill will most likely be attached to the specific person rather than the business.
Goodwill is also a recurring factor when working through strategic decisions in preparing to sell your business or retire.
Disposal of an asset and capital gains tax
With the transfer of an asset, there will be a “disposal” at market value to calculate capital gains tax (CGT). A “disposal” is explained in tax and finance literature as an asset-related event that triggers the liability for capital gains tax, including when you transfer ownership. It is any event, act, forbearance or operation of law that has the outcome of an asset being created, changed, transferred, becoming extinct, being distributed by a company to a shareholder, or the sale or donation of the ownership of an asset. That is a very broad net so assets must be dealt with carefully.
However, don’t panic about the gains from that ‘disposal’. You might be able to holdover those gains:
Under TCGA 1992, s162 – you might have heard this being referred to as incorporation relief. It may defer Capital Gains Tax when transferring a business as a going concern, but it does require the transfer of the WHOLE business (excluding some debts by concession); or
Under TCGA 1992, s165 – you might have heard this being referred to as a holdover relief where there is a trading business.
The transfer can create tax liabilities, and you may need to pay tax if relief is unavailable.
Entrepreneurs’ Relief (“ER”) may not be claimed in respect of goodwill, and the company is also unable to claim tax relief on the amortisation of the goodwill.
Transferring land & property assets and stamp duty land tax
Now that we have dealt with goodwill let us look at a tangible asset. If you have a property that is used in the business, you will most likely want to transfer it to the new limited liability company. Limited company transferring of property requires formal legal documentation and transfer ownership paperwork. As always, discuss this with your accountant to ascertain if this is the best strategic decision. The legislation relating to this states the following:
There will be a disposal with a market value transaction for CGT purposes:
A sale agreement and land transfer deed will usually be needed, and the legal title must then be updated with the Land Registry. Remember, if there is any gain achieved, then this gain may be covered by either incorporation relief or holdover relief subject to satisfying the relevant conditions.
Stamp Duty Land tax (SDLT) purposes will be calculated on the market value transaction.
If the market value of your business land or property is below the stamp duty land tax threshold, you will still be required to do an SDLT return and lodge it with the HMRC. There are exemptions on lodging the stamp duty land tax return, which are standard in cases where no money is exchanged on the property transfer. There are also exemptions where the freehold property value is less than £40, 000. Where there is chargeable consideration, the position should be checked carefully. If the property is in Wales, Land Transaction Tax applies instead.
If you and your accountant decide it is more strategic to keep the property in your own name instead of transferring it, it is common to let the property to the company. In that circumstance, you will undoubtedly have calculated the rent gain versus the tax impact of the rent on your personal tax rates. Mortgage arrangements also need separate attention because a personal mortgage cannot simply be transferred to a new entity. A limited company may deduct 100% of mortgage interest from profits, which can affect the more tax efficient choice. This might exceed the deduction for rental payments in the newly incorporated company, which may only be offset against corporation tax.
Remember, you will most likely lose the benefit of Entrepreneurs’ Relief on a future disposal of the property if rent is charged on the property. Additionally, you will only receive Inheritance Tax Business Property Relief (IHT BPR) at 50% of the property value on death. If the property had been transferred across to the incorporated company, the BPR could be at 100%.
Fixtures & fittings assets that are inherent to the building
There will most likely be fixtures and fittings included in the property. If these are inherent to that property, it might potentially qualify for capital allowances. Be sure to identify these, evaluate them, and add them to the relevant pool prior to transferring the business into the newly incorporated company structure.
Investment land & property assets that are not a trade property
The disposal transaction that will occur for the purposes of CGT will be a market value transaction even though this investment property is not a trade property. If it has sufficient factors to qualify it as a business, then refer to TCGA 1992, s162, for incorporation relief availability.
If the property is a United Kingdom residential property, the CGT rate is at 28%.
The disposal of the property will take place at market value for Stamp Duty Land tax (SDLT) purposes unless it is undergoing a transfer from a partnership or LLP.
In the circumstances of the property being a residential property, then:
It is likely that an additional 3% rate will apply to the transaction;
Multiple properties may attract Multiple Dwellings Relief;
6 or more properties will require you to choose one to apply the non-residential rates to; and
If these are market-term leased properties with unconnected third party tenants, or the property is less than £500k in value, then the 15% super rate for corporate acquisitions is not applicable.
If the property is less than £500k in value or if the property is let to an unconnected third party (on market terms), then the Annual Tax on Enveloped Dwellings (ATED) should not apply either.
Transferring plant & machinery assets
If the assets have not gone up in value, there are usually no CGT implications as the profits and losses will be dealt with through capital allowances. The plant and machinery assets can be sold to the company for any value up to the market value, and there will be a balancing charge/allowance resulting from this.
Even if you decide to transfer the plant and machinery assets to the company at nil value, it will be deemed, by tax law, that they have been transferred to the company at market value.
As the sole proprietor/trader and, therefore, as the transferor, you can jointly elect with the company to treat the assets as though they were transferred at Tax Written Down Value (TWDV) for tax purposes. TWDV of an asset is the expenditure remaining after capital allowances have been claimed. If the disposal value of the asset is less than the TWDV, then a balancing allowance can be claimed as a final deduction for that asset.
Stock & work in progress assets
These are obvious transfers that occur when transferring assets from a sole trader to a limited company as it needs to continue to operate and trade as seamlessly as possible. As you would expect, they will be transferred across to the new company at market value and will generate a trading profit or loss for the original business.
If they are sold at a discount, then they can be treated as being sold at the higher of:
Cost; and
The agreed price
If they are not transferred across to the new company, then the law deems that you, as the sole proprietor, have purchased them for your own use.
Debtors & creditors as assets
Any audited, outstanding debt will be transferred to the new, incorporated company at the book value. It often occurs that debtors fail to update their creditor banking details timeously. Hence, as the proprietor, you will usually continue to receive some payments after the transfer cut-off accounting date. These are then adjusted through your director’s loan account.
Debtors are not always transferred to the new company. In such scenarios, your (the proprietor’s) capital account is to reflect this. You will carry the risk and will get to keep the receipts that occur. You will also carry the responsibility of having to settle these personally. Once the company is operating, money can usually be extracted by salary, dividends, or repayment through the director’s loan account.
Cash in the bank as an asset
Cash is generally not transferred to the company, but if it needs cash, it would be far more efficient for you, as the proprietor, to lend this cash to the business. You can then draw down on this loan tax paid.
Vat issues relating to the transfer of a business
The HMRC website covers this topic extensively; however, here are the main extracts. The transfer of a business into a new structure will be seen as a ‘transfer of a business as a going concern’ (TOGC):“Normally the sale of the assets of a VAT-registered business, or a business required to be VAT registered, will be subject to VAT at the appropriate rate. But if you sell assets as part of a business, which is a going concern then, subject to certain conditions, no supply takes place for VAT purposes and no VAT is chargeable.” If the property has been opted to tax, VAT treatment may differ even within a TOGC analysis.
Remember that dealing with the VAT aspect is obligatory, not a choice. Establish from the outset whether the sale is a TOGC regardless of whether your sale of assets would otherwise be treated as exempt or zero-rated.
These are the conditions listed on the HMRC website to confirm whether a TOGC is applicable. ALL of these need to be met in order for TOGC for VAT purposes to apply:
The assets, such as stock-in-trade, machinery, goodwill, premises, and fixtures and fittings, must be sold as part of the TOGC.
The buyer must intend to use the assets in carrying on the same kind of business as the seller – this does not need to be identical to that of the seller, but the buyer must be in possession of a business rather than simply a set of assets.
Where a seller is a taxable person, the buyer must be a taxable person already or become one as the result of the transfer.
In respect of land or buildings which would be standard-rated if it were supplied, the buyer must notify HMRC that they have opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date.
Where only part of the business is sold it must be capable of operating separately.
There must not be a series of immediately consecutive transfers of the business.
Suppose you, as the transferor, have been trading below the VAT registration limit. In that case, the disposal, including trading stock, might theoretically take you over the registration limit. Still, it will be deemed not to do so because it can be treated as a TOGC and therefore not a supply.
Register the limited company with Companies House using your chosen company name, registered office address, and the Memorandum and Articles of Association, then provide those company details to HMRC. The company must also register for Corporation Tax within three months of starting operations, and plan for annual corporation tax returns. Limited companies must file annual accounts and a yearly Confirmation Statement with Companies House. Directors must keep accurate records under the Companies Act 2006. When the sole trader business stops, HMRC should be told, and the final Self Assessment, self assessment tax return, and assessment tax return should show the cessation.
The HMRC website is very detailed, and we encourage you to read it. If you still need further clarification, it would be wise to contact that accountant waiting in the wings or read our extensive business development advice to find out more about asset transfer from a sole trader to a limited company. Also make sure your new company details, including the business bank account where relevant, are updated with clients, suppliers, other stakeholders, and across existing contracts, and check that the same information is consistent if a family member is involved in the business.
If you want to transfer property from a sole trader to a limited company, you are legally moving the asset into the new company, usually at market value for Capital Gains Tax and Stamp Duty Land Tax purposes, with potential reliefs available if the conditions are met. As a successful entrepreneur, you will most likely come to the decision phase wherein you will need to change from a sole trader to a limited company, and that makes the transfer of business property and other assets a key part of the process. Our article ‘Sole trader to a limited company – How to make the transition‘ is a thorough step-by-step guide to working through this transition.
The strategic and practical help received from an accountant would be prudent at this time. For sole traders and business owners planning incorporation, this guide explains why assets are transferred, which assets are involved including property and goodwill, how valuation works, the tax position for Capital Gains Tax, Stamp Duty and VAT, and the wider strategic points that can affect liability, structure and the long-term efficiency of the business transfer. Here is what you need to know:
