Is there disincorporation relief when converting a limited company to a sole trader in the UK?

Full answer

Disincorporation -- the process of winding down a limited company and reverting to trading as a sole trader or partnership -- does not benefit from a specific tax relief in current UK law. History of Disincorporation Relief HMRC introduced a temporary Disincorporation Relief (Section 162B TCGA 1992) from 1 April 2013 to 31 March 2018. It allowed a company to transfer goodwill, land and other assets to shareholders without triggering a corporation tax gain, provided conditions were met. The relief was not widely used and was allowed to lapse without renewal. Current tax position on disincorporation When assets (including goodwill, property, plant and machinery) are transferred from the company to the shareholders: 1. Corporation Tax on company gains: -- The company is deemed to dispose of assets at market value (TCGA 1992 s17/CTA 2010 transactions with connected parties) -- Any gain above the company's cost base is subject to CT at 19-25% -- Goodwill created after 7 July 2015: no corporation tax deduction on creation, but CT on disposal gain 2. Income tax on value extracted by shareholders: -- The transfer of assets from the company to shareholders at undervalue (or as a distribution) is treated as a distribution (dividend) to the extent of the market value over consideration paid -- Shareholder pays income tax at dividend rates (8.75% / 33.75% / 39.35%) on the distribution Most tax-efficient disincorporation routes -- Members Voluntary Liquidation (MVL): appoint a licensed insolvency practitioner to wind up the company. Distributions to shareholders in a formal liquidation are generally treated as capital rather than income. If BADR (Business Asset Disposal Relief) applies: CGT at 14% (from 6 April 2025) / 18% (from 6 April 2026). This is usually more efficient than paying income tax at dividend rates -- Only viable if the company is solvent and the director qualifies for BADR on the shares Commercial considerations Contracts, VAT registration, PAYE schemes and employment contracts must all be transferred or novated when a company ceases trading and an individual takes over the business. Careful planning is needed to avoid disruption to customers, suppliers and employees.

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