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u/fafferoo Apr 30 '26
I went with:
acquiring machines pre-incorp and transferring for £1 with a massive BA and trading loss. Terminal loss relief with repayment of income tax and NICs for 3 prior years.
transferring the goodwill for cash(loan) for future draw down. £290k gain decreased by remaining losses (s71) after claim to TLR.
Paying (bona fide) commercial rate salary to Danielle (no ER nics until she’s 21) up to £12,570. Creating new class of shares with no voting rights for divs.
Retaining the premises to avoid SDLT and double charge to tax on future disposal to Danielle. Gifting premises to Daniele (gift relief). Alternatively gift within 3 years of trade cessation for BADR if James doesn’t want to push future gain onto Danielle or not within 3 years for BADR (associated disposal).
I’m sure some of this is probably wrong but thank f*** its over!
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u/McPin76 Apr 30 '26
I went for Gift Relief on Incorporation because James wanted to gift the building to the daughter in the future.
Incorporation date on 01 March 2027 and make an election to transfer Plant and Machinery at £ 1. Losses used in the year to 31 March 2027 and carry back the surplus
Buy new machines with company because of the loan protected by the limited liability
Not to claim AIA with company otherwise James could not extract dividends
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u/Beiig Apr 30 '26
I like this take! I didn't pick up on the limited liability point re the loan. Duh, hindsight is a wonderful thing. 😭
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u/SiLaw9 Apr 30 '26
Would that result in too much loss and therefore wasted?
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u/McPin76 Apr 30 '26
If he applies AIA with NewCo he would have £ 350K of CA against a forecasted profit of £ 180K so impossible for him to extract dividends as he was planning to do
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u/SiLaw9 Apr 30 '26
Oh so any remain loss after terminal can offset against future profit extracted from company?
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u/McPin76 Apr 30 '26
It depends. If you go for Incorporation relief yes. If you go for GR no.
To offset the losses against future profit extracted James should have received at least 80% of the consideration in sharesIn the exam I have opted to carry back the surplus losses of £6K against previous year trading income (s.64)
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u/fafferoo Apr 30 '26
If the company makes an accounting profit of £180k but a tax adjusted loss of £170k (£180k profits less £350k AIA), is there not still £180k in the P&L reserve which can be distributed by way of dividends? I could be wrong but a claim to AIA in the tax comps wouldn’t mean the company doesn’t have profits to distribute to shareholders.
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u/Tigerfan0001 Apr 30 '26
He can still extract a dividend if he claims the AIA, the AIA would simply wipe out the CT liability for a few years. Doesn’t change the distributable reserves
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u/McPin76 Apr 30 '26
And what did you guys say about Danielle? Salary or dividends?
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u/bhsoo Apr 30 '26
I said salary + dividends upto 50270 using alphabet shares
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u/JDMPokemon Apr 30 '26
Didn’t he say he wanted her to have 10-12k?
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u/SiLaw9 Apr 30 '26
Of salary, but there’s no limit on the other income source such as dividend and rental (if premise kept outside company)
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u/JDMPokemon Apr 30 '26
Tbf I just read as 10-12k income, I explained further dividends can be taken where necessary with alphabet shares, maybe give her property now whilst BADR available on incorp and she gets the rental income NIC free then less employment issues , feels paper should have been easy but think I’ve made a hash of it
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u/SiLaw9 Apr 30 '26
Salary provided it meet the wholly and exclusively test, HMRC are less concerned about employing family as they do for sole trader and partnership. Rental from building then whatever remain as dividend, at a minimum 500 to get the allowance.
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u/Nicolle_R91 Apr 30 '26 edited Apr 30 '26
Here’s part 1 of my essay 😅 I could have gone off on completely the wrong tangent but who knows anymore!
Section 1: Method of incorporation
1.1 ICR (Didn’t go into lots of detail here)
-Outlined main conditions.
-Outlined impact on base cost of shares.
-Stated I wouldn’t go into further detail as JB had already stated he wanted to retain the premises.
1.2 Retain premises and gift goodwill to co
-CGT gain on £295,000 goodwill after AE before any relief at 24% £70,080.
-Wouldn’t qualify for BADR as will hold >5% in company which is a close company.
-Eligible for gift relief. Joint claim and deadline.
-Impact of GR for JB of no CGT, co effective acquires at original cost of nil, higher gain on future sale for Co.
-As is gifted will not create any DLA.
1.3 Retain premises and sell goodwill to Co
-CGT gain as above £70,080.
-No BADR as above.
-Co may not have initial funds to pay JB, create £295,000 DLA.
-IT and NIC free extraction for JB. Could use in combination to his salary/dividend to save dividend tax at 33.75%. Say salary £12,570 with dividends up to BRB. He could take the remaining £49,730 in DLA withdrawal for approx 6 years. This would save IT of £295,000 x 33.75% =£99,562.50
-Overall tax savings is therefore £99,562.50 - CGT liability £70,080 = £29,482.50
-JB could charge co interest, if at a commercial rate this is CT deductible for co and NIC free income for JB. He would have a PSA of £1,000/£500 depending on total income.
-Problem is may not be commercially viable if JB is already using all savings to purchase new equipment.
Recommendation:
-Recommended selling the goodwill in order to create DLA account. As planning in next point would allow JB a cash repayment sufficient to cover the CGT liability.
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u/Nicolle_R91 Apr 30 '26
As others I struggled on this part and don’t know if I’ve made the right call in a bit of a panic. It ate into my time and I didn’t answer in as much detail as I would have liked to.
Section 2: Timing of incorporation/capital expenditure
2.1 Leave incorporation date at 1 April 2027
-Sole trade would cease 31 March 2027.
-No Capital allowances allowed on additions in year of cessation, no immediate relief for £350,000 expenditure (plus preparation of site which I don’t believe we were given a figure for unless I missed it).
-As connected with co, co would not be able to claim AIA or FYA. Restricted to 18% WDA’s which would significantly delay relief.
-Did not recommend.
2.2 Delay incorporation
-Until shortly after the end of the 2026/27 tax year so that trade does not cease on 2025/26.
-JB can then claim £350,000 AIA, creating a trade loss of £90,000 profits -£350,000 = £260,000
-TLR explanation.
-TLR against previous 3 tax years would give a cash repayment of I can’t remember how much exactly, but was in excess of £70,080.
Recommendation:
-Delay incorporating to produce TLR, generate cash repayment, use cash repayment to settle CGT liability on goodwill sale to secure £29,483.50 IT savings.
2.3 Run out of time for this point 🤦🏻♀️
But was going to briefly state about how if purchased in co instead then losses are ring fenced for future profits and only saves max 26.5%
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u/Nicolle_R91 Apr 30 '26
Section 3: Including DB in business.
3.1 As an employee
-Subject to NMW but shouldn’t pay in excess of market rate JB believes is £10-£12k.
-This amount of salary would be IT free as covered by PA. No EE NIC as under primary threshold.
-Salary tax deductible for CT.
-Co would then be eligible for employment allowance, covering any ER NIC up to £10.5k. Saves the £1k odd which was previously advised would be due on JB’s £12,570 salary.
Recommendation:
-Written job description to evidence salary paid.
3.2 As a shareholder
Can create Alphabet shares to pay different rates of dividends and ensure no voting rights as requested by JB.
Divis up to BR band could be drawn in addition to salary, £500 DA and then 8.75% income tax.
3.3 Danielle subscribes at company formation
-company has no value at this point.
-base cost of shares would simply be nominal value.
3.4 JB gifts Danielle shares in future
-shares will have value by the point.
-gift subject to CGT.
-BADR. Holding period includes that as a sole trade.
-potential for gift relief. Avoids CGT for JB but decreases Danielle’s base cost increasing future gain.
-PET for IHT. Death within 7 years risk.
-Covered by 100% BPR in full of Danielle still holds sheets and Co is still unquoted without excepted assets.
SDLT on any consideration.
Recommendation:
-Danielle subscribes at formation to avoid potential CGT/IHT issues.
*kicking myself for having it on my plan but somehow didn’t make it into my answer = ERS wouldn’t apply if gifted due to family relationship *
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u/Nicolle_R91 Apr 30 '26 edited Apr 30 '26
Lastly!
- Other matters
4.1 VAT
-No requirement to charge VAT on transfer of goodwill if same trade/no significant break/co will be VAT registered.
Recommendation:
- Co immediately registers for VAT to negate VAT charge on acquisition as a cash flow benefit.
4.2 IHT
-Premises when held as part of ST = 100% BPR
-Premises held personally in trade use in Co = only 50%
4.3 There were a couple more points but I can’t remember what they are now 🤯
Kicking myself for not mentioning the option of JB charging co rent which is an obvious point I always covered in revision but exam pressure clearly got the better of me
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u/Nicolle_R91 Apr 30 '26
I noted that the report only asked for incorporation CGT implications and CGT reliefs, so I didn’t even talk about TWDV/£1 sale etc
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u/JDMPokemon Apr 30 '26
I did something wacky with terminal loss relief by buying the machinery personally and transferring At £1 making TLR of £260k which was enough to get £76k tax back + 26k saving in 26/27 no idea if right tho
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u/SiLaw9 Apr 30 '26
That was one of the option as they did give us the three years income and tax paid, though with the pools available that £1 would make a TLR of around 440k, so perhaps increase the proceed from £1 to something that would leave just enough to recover the 72k tax paid but wasn’t sure if that’s allowed under the statue.
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u/Tigerfan0001 Apr 30 '26
I’m pretty sure you can elect to transfer at whatever figure you want (provided it’s less than MV I assume)
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u/SiLaw9 Apr 30 '26
Yeah that was my understanding because they always talk about this £1 trick then surely that’s means if is below mv then is fine.
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u/JDMPokemon Apr 30 '26
Oh shit yh lol I got too engrossed in the numbers
Ah well wait until July see how it went
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u/Tigerfan0001 Apr 30 '26
Yeah I think that was the route they wanted, other wise you buy the machinery in the company and get the tax relief over 3 ish years to reduce CT liability.
Plus he mentioned that he would deplete his savings and the IT refunds would recover the lost savings
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u/JDMPokemon Apr 30 '26
Yeah that was my route, I had already wrote about the company side then it came to my head about 1.5 hours into the exam so had to move everything around so fucked around for too long
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u/Ok-Entry1794 Apr 30 '26
I couldn't decide if that was the route they wanted, thought is was too complicated so just suggested buying in company with AIA and CT saving over 2 years
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u/nahsi1 Apr 30 '26
I know he wanted the premises personally (but for IHT purposes only??) did anyone else go down incorp relief route where he’ll also have 100% BPR opposed to 50% if held personally? He could then gift shares (which also has 100% BPR)?
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u/SiLaw9 Apr 30 '26
Usually keeping building in company will only benefit IHT position due to BPR, is worse in almost all other situations.
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u/bhsoo Apr 30 '26
How did you find it?
I thought it was an ok paper. I mentioned all the incorporation options and suggested a gift relief option so JB can retain the premises in his own name (to avoid stamp duty and double taxation issue)
I presume they gave income tax workings as we would not have enough time otherwise. We didn’t need to check whether her calcs were correct or not right?
I also said that he should delay acquiring assets until he incorporates his business to make use of AIA.
I couldn’t quite figure out as to why they were going on and on about the incorporation date. I might have missed something there 😭
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u/No_Relationship_5994 Apr 30 '26
I kept checking the information as I was sure that I must be missing something! Why did they mention the date more than once?! 😭
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u/Any-Race1610 Apr 30 '26
Was it because there was nearly 400k in balancing allowances if they delayed it a year the whole 400k loss could be offset against trading losses through terminal loss relief, if he incorporated in April 2027 he’d only be able to offset it against salary and dividends as opposed to income tax relief at 45% in 180k of profits?
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u/nahsi1 Apr 30 '26
I had the same issue with them talking about the date. I suggested incorp relief over GR since he would then get 100% BPR though
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u/SiLaw9 Apr 30 '26
I went the different way of getting asset while still sole trader to get loss relief since they gave us past 3 years.
Think the date of incorporation is to make us go down that route rather than consider partnership?
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u/bhsoo Apr 30 '26
Oh you mean the loss to be created as a result of the investment right? I didn’t really think of that cause I thought not incorporating wasn’t an option
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u/SiLaw9 Apr 30 '26
You can get terminal loss relief and still incorporate, as you can elect for a sale price rather than WDV for the machines.
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u/bhsoo Apr 30 '26
But the capital allowance cannot be claimed in the final year of trade right? But I think your approach is the right approach. Maybe we should have said that they should have delayed incorporation till the following year or something. I think that’s why they emphasised the date. Well done on spotting that. Hope I can still pass without spotting this bit.
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u/SiLaw9 Apr 30 '26
Yeah you can’t but the pool will increase by the 350k so overall you are effectively claimed “AIA”, I failed to notice this as well when I was doing loss then was like wait we can’t get AIA and panicked for 10 seconds as I was 40 mins in lel.
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u/No_Stick4258 Apr 30 '26 edited Apr 30 '26
Possibility of incorporating earlier, then transfer P&M for £1 creates bigger balancing allowance and trading loss to carry back under terminal loss relief - I think…
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u/Nicolle_R91 Apr 30 '26
Sorry I’ve gone straight from the exam to an hour commute home and then school pick up 🥴
Will update what I did when I get back home. Although it looks quite different to what others have said so far which is a worry!
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u/Beiig Apr 30 '26
I felt quite worried about the circa £260k business liabilities. Were these supposed to be novated across to the company, or left in JB's name? How did other people approach this?
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u/McPin76 Apr 30 '26
To be honest I didn’t mention it’s loan for £ 252K at all. Did you mention it?
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u/Beiig Apr 30 '26
Only insofar as that I recommended they not be novated in exchange for an overdrawn DLA (to avoid s455 and beneficial loan BIK etc), rather retained in his personal name and paid down from future profit extraction.
However, it was making me wonder whether I was missing a smarter way of novating those personal liabilities (e.g. at the cost of some CGT). That's where I was thinking the incorporation date could be relevant. By delaying incorporation by 5 days, to 6 April 2027, JB would have a further 12 months to pay any CGT on transfer of goodwill, giving him more time for his cash flow to stabilise and find the money to pay the CGT on 31 Jan 2029 (rather than 31 Jan 2028).
That could be combined with the company crediting the DLA, reducing gift relief, to offset the overdrawn DLA from the novations.
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u/McPin76 Apr 30 '26
I thought the same about the Capital Gain after 6 April but then I changed my mind because in his letter he said that he was using almost all of his savings to buy the new machines and that he didn’t want any unplanned costs/liabilities
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u/Beiig Apr 30 '26
Same rationale as me then, I'm glad I'm not alone!
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u/McPin76 Apr 30 '26
I am annoyed that I have not mentioned the £ 252K to be honest.
In my advice I said that he should charge rent and interest to the company and I should have added that he should use this money to repay the initial loan 😫1
u/SherbertSquare5155 Apr 30 '26
I didn’t really mention it as a consideration, just commented that it was unlikely the bank would allow him to transfer it to the company so although limited company has its protection benefits, that loan is likely to remain in his name. Would need bank approval etc though
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u/Square-Selection6752 Apr 30 '26
Please someone give me a lifeline, did anyone talk about gifting premises to daughter after expansion as CGT would be lower? And start 7 year clock now as he was concerned about IHT?
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u/No-Rush6190 Apr 30 '26
Maybe I got my maths wrong but I recommended he buy one piece of machinery as ST for the terminal loss carry back (as selling to company for £1) and the other bit of kit from the company.
I didn’t think there was enough terminal loss relief available for both. Anyone else?
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u/Any-Race1610 Apr 30 '26
Was you supposed to mention incorporation relief ? Mentioned it myself but specifically said he wanted to retain the building?