Reader’s question: I am a sole trader and have machinery worth £20k. If I transfer this to a Limited company by selling it to the company and setup as a director loan in the company, how do I treat this from a self-assessment point of view….do I pay CGT on the £20k?
Expert answer: The expert for this question is Stuart Crook, partner at Wellers.
In this instance, Capital Gains Tax (CGT) would not normally apply. However, there are a few different ways to handle the situation and transfer the asset at the tax written down value to avoid personal tax implications. Let me explain this in more detail.
Sole Trader expense
As a sole trader, you will have been taxed under a self-assessment tax return, which would have included income tax and National Insurance. As part of a sole trader business, there are potential reliefs available for Capital Expenditure (CapEx), which is the money an organisation or corporate entity spends to buy, maintain, or improve its fixed assets. In this case it was machinery. These reliefs will have been given as Capital Allowances and treated as a deduction against the sole trader profits. So, subject to certain rules, there should have been up to a £20k deduction taken off your tax and National Insurance contributions.
CGT does not apply
Now, at the point that the sole trader business is incorporated to become a Limited company, there are two fundamental questions. Firstly, how does the business owner deal with the fact that they as a sole trader benefitted from the £20k deduction, rather than the business as an entity? Secondly, does the sole trader have to repay some of the initial benefit so that the company can benefit?
The answer to the latter question is no, which is why CGT doesn’t need to apply in this instance.
In regard to the first question, although the individual benefitted initially, a sole trader business can be incorporated and assets transferred at the tax written down price as part of Incorporation Relief, rather than CGT. This is because the assets can be transferred with no personal tax impact if you qualify for the relief shown by HMRC here – Incorporation Relief – GOV.UK (www.gov.uk).
Future tax allowance
This does mean that you cannot claim any future tax allowances relating to the machinery, because you can only benefit once, but it also means the trader doesn’t need to repay anything now when they have received no funds or pay any additional tax in the future. If in doubt, always contact your accountant for additional advice.
More on ask the experts and sole trader expenses.
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