Case study - Incorporation Relief and Entrepreneur's Relief

A client incorporates his sole trade business on December 2019 by transferring assets to a new company of which he is the 100% shareholder. 

This is a haulage company.  His chargeable gains on incorporation are:

Premises - £115,000

Vehicle depot - £60,000

Goodwill - £150,000

The haulage company offers the client £400,000 in ordinary shares and £100,000 left outstanding on director’s loan accounts.  The client is a higher rate tax payer in 2019/20.

The client has made no other disposals during 2019/20 which used up his annual exempt amount.  The gains eligible for Entrepreneur’s Relief are the gains on the premises and the gains on the vehicle depot.

The gains on the goodwill are however not eligible for Entrepreneur’s Relief, therefore the total gains eligible for Entrepreneur’s Relief are £175,000 and the gains not eligible for Entrepreneur’s Relief are £150,000.

We then calculate the Incorporation Relief which is 'Gains x (the shares received/over total consideration)' which amounts to £175,000 x (£400,000 / £500,000) = £140,000 Incorporation Relief set against the gains which are eligible for Entrepreneur’s Relief and £120,000 for the gains not eligible for Entrepreneur’s Relief, that calculation being £150,000 x (£400,000 / £500,00) amounting to £120,000. 

This leaves chargeable gains of £35,000 in respect of gains eligible for Entrepreneur’s Relief and £30,000 in respect of gains which are not eligible for Entrepreneur’s Relief.  The chargeable gains are £35,000 x 10% representing the Entrepreneur’s Relief and £30,000 x 20% being the gains not eligible for Entrepreneur’s Relief, so in this instance he we will have received a tax bill of £9,500.

So wherever there is loan stock in this arrangement we need to also consider Entrepreneur’s Relief.  If there is no loan stock then all the gains would be covered by Incorporation Relief.

If you have any questions please call us on 020 7481 2422 or email us at wellers.wealth@wellerslawgroup.com if you would like to know more.

This case study was written by Ingrid McCleave and the law is correct as at 24th November 2020. Please note that tax legislation changes frequently, so this article should not be relied upon without seeking further legal advice.