October 26th, 2012 / Insight posted in

Sole trader turns into a company

WP writes: I have a consultancy business that operates as a sole trader and makes annual profits of £30,000. I want to transfer it to a company to protect myself and also to create a tax-efficient vehicle. I understand that it is possible to sell the goodwill to the company to make further tax savings. Is this the best route for me, and how do I go about it?

There are different methods of transferring a business into a company, writes Jon Sutcliffe, partner at Kingston Smith. A tax liability could arise on the transfer of assets for more than their tax cost. Examples of this would be goodwill and fixed assets. The transfer can be made as a gift, or using incorporation relief, or as a sale. Only the latter option will create a sale of goodwill for market value. This in turn will make you liable for CGT on the goodwill gain, but will leave you a larger balance that can be drawn free of tax. In the right circumstances, it is possible for the sale of goodwill of £30,000 to be tax free. Given the level of your profits, your goodwill may be worth only £10,000 at best. After deduction of your annual CGT exemption and any taper relief, there will be no CGT due. You will need to have your sole-trader accounts drawn up to the date of transfer, and may be entitled to overlap relief through your tax return. These profits will then be shown in your tax return, as will the transfer or sale of the business to the company. Whatever you do, take professional advice.