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Business Structures and IncorporationCapital Gains TaxIncorporation ReliefSDLTProfit Extraction

ACCA · Question 03 · Business Structures and Incorporation

SECTION B: ADVISORY REPORT 2

This question is worth 25 marks.

You are a tax consultant advising the partners of 'Apex Consulting LLP', a successful professional services partnership. The three equal partners (David, Elena, and Faisal) wish to incorporate the business into a newly formed limited company, 'Apex Ltd', on 1 October 2024.

Exhibit 1: Business Assets
The partnership assets include goodwill valued at £600,000, office equipment at £150,000, and working capital. The partners are considering whether to transfer the business as a going concern in exchange for shares in Apex Ltd.

Exhibit 2: Commercial Property
David and Elena jointly own the freehold of the commercial office building from which the LLP operates. The property is valued at £900,000. They plan to sell this property to Apex Ltd at market value, leaving the proceeds outstanding on a director's loan account.

Requirements:
Write a letter to the partners of Apex Consulting LLP which:
(a) Compares the Capital Gains Tax (CGT) implications of using Incorporation Relief (s.162) versus Gift Relief (s.165) for the transfer of the partnership assets (including goodwill) to Apex Ltd. (12 marks)
(b) Advises on the Stamp Duty Land Tax (SDLT) and Corporation Tax implications for Apex Ltd upon acquiring the commercial property from the partners. (8 marks)
(c) Briefly outlines the most tax-efficient strategy for the partners to extract profits from Apex Ltd post-incorporation, comparing salary, dividends, and interest on the director's loan. (5 marks)

How to approach this question

Format as a letter. For (a), contrast the mechanics of s.162 (automatic, rolls gain into shares, requires transfer of all assets for shares) with s.165 (elective, rolls gain into the asset's base cost in the company, allows creation of loan accounts). For (b), highlight the connected party market value rule for SDLT, and note that interest on the loan account saves corporation tax. For (c), provide the classic low salary / high dividend / interest extraction model.

Full Answer

Incorporating a partnership requires careful CGT planning. s.162 is automatic if all assets transfer for shares, deferring the gain into the shares. s.165 is elective and defers the gain into the company's assets. s.165 is often preferred because it allows the creation of a director's loan account up to the original base cost of the assets without triggering tax. For SDLT, connected party rules dictate that market value is used, preventing avoidance through undervalue sales. Profit extraction relies on balancing corporation tax deductions (salary/interest) against personal tax rates (dividends).

Common mistakes

Students often state that s.162 and s.165 do the same thing. They do not; s.162 rolls the gain into the shares, while s.165 rolls it into the assets. Another common mistake is forgetting that SDLT on connected party transfers is always based on market value, not the actual price paid.
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