The team here at Coleman and Co have a few tips to take into account if you are thinking of incorporating your business in the near future.
Sole traders, LLP’s and Partnerships were able to establish a large value for their goodwill and up until December 2014, they were able to transfer that value to a limited company. By doing this, they only paid 10% capital gains tax and were able to claim entrepreneurs’ relief.
Those involved in this value transfer were then able draw down on the loan that was created between the two companies and build on it overtime when any future cash was generated. This tax planning strategy slowly turned down hill when the entrepreneurs’ relief was denied if the two companies were relatives and other strategies had to be looked at.
Now that the highest rate of capital gains tax has been reduced to 20% from April 2016, you can no longer get 28% on such transfers. So instead of following this strategy, it may be advisable that you choose a different route when looking at incorporating your business.
You should now consider charging interest to the actual company receiving the loan as this is effectively more tax efficient than getting dividends for higher tax rate payers. Other points to look at while thinking about incorporating your business include:
- Look at the legal aspect of it all (ensure your assets are protected)
- Consider the taxes you will pay
- Include investments
- Consider partner costs and expenses
The criteria to make sure you cover include ensuring your business has sufficient revenue, there are tax savings to come from incorporating, there is no risk for your business and that you can justify all reasons for incorporating your business.