The existing business
Part 4 of 4
This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).
So far in this article we have reviewed some of the fundamental rules relating to the taxation of the unincorporated business, compared the total tax paid on the profits of a business depending on the business vehicle used and looked at the tax implications of the cessation of a business.
In this final part we will look at some of the issues relating to the sale of a business.
General
The sale of a business is a cessation of trade for the purposes of income tax. Accordingly, the issues set out above in relation to date of cessation are also relevant on a sale.
A succession election is available for the purposes of capital allowances provided the business has been sold to a connected person – for example, a company controlled by the sole trader. Under a succession election, assets are transferred at tax written down value, thus avoiding balancing adjustments.
The conditions relating to business asset disposal relief are of crucial importance because of the potential significance of the relief.
Value added tax (VAT) should be charged on the sale of a business unless it is a qualifying transfer of a going concern. Where it is such a transfer, VAT must still be charged on any taxable buildings (for example, where an option to tax has been made) unless the purchaser also opts to tax the building.
There may be a Stamp Duty Land Tax (SDLT) liability on the sale of any land or buildings. Any liability to SDLT will be payable by the purchaser.
Sale of a business to a company
A business can be sold to a company controlled by the trader or one that is independent of the trader. The consideration for the sale may consist of cash and/or debt and/or shares.
Where part of the consideration is in the form of shares in the company, incorporation relief will be given automatically (provided the relevant conditions are satisfied), such that some or all of the chargeable gains on the disposal of the business assets can be rolled over against the base cost of the shares. The starting point for the base cost of the shares is the market value of the assets sold in exchange for shares. Note that the base cost of the shares is not determined by the number of shares or their par value.
Illustration 4
Emmanuel sold the whole of his business as a going concern to Tick Ltd for £800,000. The chargeable gains on the assets sold were £340,000. The consideration consisted of £240,000 in cash with the balance (£560,000) in shares in Tick Ltd. The conditions for incorporation relief were satisfied.
| £ | ||
|---|---|---|
Chargeable gains | 340,000 | |
| Incorporation relief (£340,000 x £560,000/£800,000) | (238,000) | |
Taxable chargeable gains to be reduced by the annual exempt amount |
|
The base cost of the shares acquired is calculated as follows.
| £ | ||
|---|---|---|
Market value of the assets sold in exchange for shares | 560,000 | |
| Incorporation relief | (238,000) | |
Base cost of the shares | 322,000 |
A taxpayer can choose to disapply incorporation relief if it is advantageous to do so. The advantage of doing so is that the taxpayer’s base cost in the shares will be greater, such that any future chargeable gain on the disposal of the shares will be smaller. The disadvantage of disapplying the relief is that the unrelieved chargeable gains in the year of incorporation will be greater (although capital losses or the annual exempt amount may be available).
It is particularly relevant to consider the conditions in respect of the availability of business asset disposal relief here. The relief may be available on the sale of the unincorporated business to the company but may not be available on the eventual sale of the shares depending on whether or not the conditions are satisfied.
Any unrelieved trading losses of the sole trader can be carried forward for offset against employment income, dividend income and interest income derived from the company in the future (provided the relevant conditions are satisfied). Note that the losses cannot be transferred to the company.
In order to be able to handle questions concerning an unincorporated business:
Note: The unincorporated business is also considered in:
Written by a member of the ATX-UK examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.