Partnership to Ltd Co

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT member discussion
I have recently been asked to assist in transferring a partnership over to a ltd co.
The original business was purchased 4 years ago and has £30k of goodwill on the balance sheet. The business has since grown well - t/over £350k last year- hence the Ltd co.
Need some thoughts on how to deal with the Goodwill and also the transfer of assets / liabilities ?
Any suggestions?.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Sharon,

    In terms of the transfer of assets/liabilities these will be credited to the directors loan account (assuming that the assets are in excess of the liabilities which they should be). You would simply mirror image the partnership balance sheet to the Ltd co and offset the difference to the directors loan account (under current liabs). You would also post the ordinary share capital to their loan accounts as well. Therefore there wouldn't be any capital accounts/drawings (these would be director loan accounts) and you would have share capital on the B/S.

    In terms of goodwill - how many partners are there? The reason I ask is that CGT kicks in on incorporation.


    regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Steve

    Thanks for the confirmation - It was really the goodwill bit I was concerned about.

    There are 2 partners - 30k being the amount they originally paid for the business. Although there were legal probs as the seller continued to trade until legal action was taken !!!

    Advice very much appreciated.

    Regards
    Sharon
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    I had a case a few weeks ago with a client (sole trader) incorporating into a Ltd Co. Even though the client did it because he was making substantial profits - he had a hugely overdrawn capital account due to losses in prior years and his exotic lifestyle.

    What we did was put the goodwill in at £30k thus ensuring that the capital gains tax would be covered by his annual exemption. Perhaps this is an issue which you could look into. The goodwill of £30k already in the partnership books may be have put in at this value for the same reason.

    Hope that helps.

    regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Thanks Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    I thought that all the rules on goodwill had changed very recently - cant remember how except that the revenue doesnt like it at all - now there's a surprise. Be very very careful before you start allocating money as goodwill.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    They have changed the rules but we did a tax planning exercise prior to allocating the g/w to ensure that there would be no tax implications.

    You are right though to advise caution before going into goodwill issues as this is an area that can be manipulated a bit like stock, hence the revenues dislike of it.

    Regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    I asked the question re goodwill because of the recent changes.
    Cant seem to be able to find any definitive information as to the most efficient way to do it.

    The co only has a small amount in its parnership current accounts and Im hoping the transfer s/be fairly 'tax free'. There are still some hefty loans oustanding from the court case against the prvious owner.

    They would like to incorprate and start trading in April. How would you go about the tax planning aspect to gain the best advantage at this tax year end?

    Sorry this is a bit garbled - hope im making sense.
    Got this dreaded flu bug at present and the brain's not working too well !!

    Regards
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    You say the partnerhsip has a small amount in its capital accounts, so I am assuming the partnership balance sheet is not insolvent.

    If the partnership is not insolvent then you can just ignore the goodwill aspect (if the partners so require). It all depends on the balance sheet of the partnership. If they are insolvent a way around this is to introduce some goodwill into the Ltd Co which could then result in a positive balance sheet. For capital gains purposes in 05/06 the annual exemption for each individual (therefore all partners) is £8,500. Therefore, the partners are correct to start trading in the LTd. Co. from April 06.

    Hope that helps. If I can be of any more help just ask.

    Regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Steve
    I work alone and mainly deal with small family run Ltd co's and the self employed. Business is growing and quite a few of the self employed are beginning to ask about incorporation especially as some are doing quite well now and have just had there tax bills for 04-05!
    .
    As I mainly deal with straight forward CT & SA returns it has been good to get some advice on the above subject.

    Sometimes I seem to imagine things are more complicated than they actually are.

    This might be a good subject for a CPD event - what do you think ?

    Many Thanks Again

    Sharon
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Sharon,

    Yes, I agree. These days many of the sole traders and partnerships are looking to incorporate in view of the tax benefits it brings. For example, Corporation Tax @ 19%, marginal rate relief, Class 4 NIC avoided and in particular profit extraction via the dividend route.

    For those members in practice - this is a hot topic! In our practice more and more sole traders/partnerships are incorporating into limited status and it is important to know (not only) the tax implications of such a process but also how the process is completed legally, i.e. the company secretarial issues.

    I would therefore agree that this would be an excellent idea for a CPD course - it is certainly relevant to all those MIPs and those who are AAT members working in practice.

    Kind regards
    Steve

    p.s. let me know if you need any more help.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Steve

    Is the tax planning aspect or incorporation going to change much when the 0% corporation tax rate is dropped?

    Annette
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Annette,

    Quite possibly - yes. Tax planning is done around the client i.e. what is most tax efficient for them. It may well be that, say, the introduction of goodwill in one client (per the example above) might trigger a CGT liability in another and therefore would result in bad planning. The incorporation process won't change as a result of 0% because that is Companies House' baby which has its own rules (form 10, form 12, annual returns etc etc) and is also governed by the Companies Act, rather than the Taxes Management Acts.

    The fact that 0% is coming in just highlights my point in that the Chancellor is closing loopholes with regard to Incorporation and therefore tax planning would seem to be a fundamental exercise to ensure the client receives the best advise.

    Regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Annette
    Don't forget to write to HMRC and request that all fixed assets are transferred at their written down value if this be the case. Ring them and ask for correct format for letter because you have to quote relevant section of relevant statute. Their website also has a section on this. YOur window for doing this is limited. You should get an acknowledgement letter back.
    Also, might point out if business is husband & wife team be aware of current Geoff & Diana Jones case - Jones v Garnett (settlements legislation) where incorporation has been been challenged by HMRC as possible tax evasion - case ongoing. Case covered in Feb ed. of Accounting Technician.
    Have assessed own clients and those which would fall in 0% band even after minimum wage salaries are generally better off as partnership due to non-qualifying distributions situation.
    If you are writing in goodwill be careful you have sound finacial basis which could not be reasonably challenged ie. the business must be capable of being sold on the open market. Suggest you get an independant valuation.
    Love to know how you finally decide to proceed.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi Annette,
    Try www.hmrc.gov.uk and look up Help Sheet IR276 - Incorporation Relief. It doesn't tell you how to work out the market value of your company but it tells you everything else you need to do.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    So sorry, I meant Sharon. Not sure where I go Annette from :oops:
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Partnership to Ltd Co

    Hi,

    Annette is BlueWednesday that's where you got that from!

    Best regards
    Ste

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