Your client intends to transfer their business to a company. They think that any resulting tax charges can be legitimately avoided. However, you believe there will be tax to pay. Who's correct?
Tax and other advantages
One of the main motives for transferring a sole-trader business to a company is tax saving. Your client may have read about the process, and how it's possible to legitimately avoid paying capital gains tax (CGT) through the use of special claims. However, what's almost invariably overlooked is the possible stamp duty land tax (SDLT) charges which can apply and are far more difficult to shake off.
Transfer to a company
When land, buildings or other assets (and even liabilities) are transferred to a company your client is connect to it's treated by HMRC as purchase at market value. The company is therefore liable to pay SDLT if the value of a property it acquires exceeds the nil rate band.
Example - John runs a business from a retail unit located in England. He owns the freehold which is valued at £300,000. He transfers his business to Jcom Ltd; he owns all the shares. Jcom is liable to SDLT of £4,500 (£150,000 x 0% + £100,000 x 2% + £50,000 x 5%). This was a tax bill John hadn't bargained for, but is there anything he could have done to avoid or reduce it?
Don't transfer the property
The simple solution would have been for John to retain personal ownership of the property and transfer only the other business assets. He can still use a special tax claim to avoid any CGT. The trouble is he may miss out on other possible tax advantages that go with company ownership of the property.
Different for partnerships
An oddity of the SDLT rules is that a partnership which transfers land or buildings to a company can make use of a relief that reduces the chargeable amount in proportion to which the partners are connected to the company.
For example, if 50% of the partners are connected with the company to which the property is transferred (director shareholders are connected to their companies), then their share of the property will not be subject to SDLT.
Tip - Spouses and close family members are connected persons for tax purposes. Therefore, where one spouse is connected to a company, say because they are a director, the other spouse is also connected. This means that where a married couple are in partnership and property is transferred to a company, only one of them needs to be connected to the company to obtain SDLT relief.
Therefore, full relief from SDLT is given whenever a family partnership transfers property to a company and at least one of the partners owns all the shares in the company.
Watch for anti-avoidance
HMRC has touch anti-avoidance rules which allow it to disapply the relief where the creation of a partnership was for the purpose of dodging SDLT. Therefore, if you want to rely on the relief, the longer your client's business operates as a partnership the less likely it is that HMRC will be able to successfully challenge them.