I have a sole trader client that has a loss-making company and qualifies for incorporation relief under TCGA 1992 S162. What happens to the losses on incorporation?
Under ITA 2007 S86 it may be possible that losses arising before the transfer may continue after incorporation. The rules apply equally to businesses that are not trades (ITA 2007, s. 86(6)).
Carry-forward relief is preserved where a business carried on by an individual, or by individuals in partnership, is transferred to a company in exchange solely or mainly for shares which the company allots to the individual or his nominee(s) (ITA 2007, s. 86). This applies both where an existing company takes over the business and where the business is newly incorporated. HMRC guidance BIM85060 refers to what they regard as “mainly” in return for shares as 80% of the consideration received. However, in the case Fawcett Properties Ltd v Buckingham the term ‘mainly’ can simply mean ‘comprising more than one-half’.
Where the trade in which the loss was incurred is transferred to a company, the loss can be carried forward and deducted from the individual’s income derived from that company. Therefore under s.86 ITA 2007 these losses will be set against the dividends (including any tax credits), interest, remuneration or rent received from the company. However, it’s not restricted by the “relief cap” provisions found in ITA 2007 S24A.
For relief to be available the shareholder still needs to own the shares throughout the whole of the tax year in which the loss relief is claimed, and the company must still be carrying on the trade. However, if the company not only carries on the same trade but also carries on a second trade, the legislation doesn’t appear to restrict the losses for the former sole trader it relation to mix trades or even income generated from non-trading sources. However, caution needs to be taken where even expanding its activities and carrying on the second trade, the company ceased to carry on the original trade.
Advisors may also wish to consider the interaction of S64/S72 ITA 2007 with S86 ITA 2007. HMRC guidance BIM85080 state that relief under S64 or S72 ITA 2007 may effectively become final before the S83, S86 or S89 relief is given. In these circumstances, there are no provisions which allows the relief under S64 or S72 to be withdrawn, and so the ‘finalised’ relief must take priority over any other relief for the same year which is claimed later.
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