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There are three main methods of incorporating a business, each having different capital gains tax considerations.
1. Transfer of a business wholly in exchange for shares in the new company. Incorporation relief is claimed so that any gain for the transferee is deferred until the shares are sold. This method requires that all the assets of the business are transferred into the new company. Where this includes a property a charge to stamp duty land tax arises.
2. Gift of goodwill to the new company. Goodwill and assets are gifted to the company. The company is then treated as acquiring them at their base cost. There is no requirement to transfer all assets, so the stamp duty charge can be avoided.
3. Sell goodwill and business assets to the company, leaving a balance on the director’s loan account. In recent years many business incorporations have been structured as a sale of the goodwill at its full market value. This requires a supporting independent valuation. HMRC will argue that goodwill should not be recognised where it relates to the personal skills of the proprietor, but goodwill from a business’s brand or good name, reputation, employee expertise, customers and client base is capable of being sold for value. In most cases entrepreneur’s relief will be available and therefore it should be possible to sell the goodwill to the new company at its fair market value with a tax charge of just 10% on up to £10 million of gains.
For further guidance contact Haxton Chartered Accountants West London.

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