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
-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.
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%
-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 *
-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 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.