Is this a fair assumption of s86? A sole trader, can carry forward any unrelieved losses into a connected company, trading in the same trade if he accepts shares by way of the difference?
-- Edited by Shamus on Tuesday 8th of March 2016 03:41:07 PM
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
No losses from a sole trade are not available for carry forward against a company's profits. This section applies to the relief of losses by the sole trader against taxable income from the company.
the rules on transfer is "wholly or mainly" in exchange for shares. The general rule is that wholly or mainly is at least 80% of the consideration receieved will be in shares.
A restriction is that the incorporated business must carry out the same activities as the unincorporated entity so, imagine that as a bookkeeper you had losses, you incorporate with the intent of becoming a training school for bookkeepers. That would not be the same business so the losses would not be available to use.
The losses are relieved against the first available income derived from the company.
The individual must hold the shares throughtout the entire tax year when the losses relief is given.
This is only a brief overview. For reference refer to Chapter 18 (cessation of an unincorporated business) of the Kaplan study text for paper P6 (advanced taxation). There's an excellent do it yourself example at the base of page 665.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I think at this rate that FA16 is going to have been actioned before the FA15 text is released.... There is just no point me buying that one now so I'll skip buying the P6 text until the release of the FA16 version (I've already got Melville for FA15).
I don't think that Kaplan took into account how many accountants who have passed the exams still buy their texts so tieing release dates to the new exam sittings rather than getting them out as soon as they can after the Autumn statement is really going to effect their sales this year.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Yes I agree there. Mine are FA14. had Melville for a short while now. I think by not publishing F6 and P6 until late, they are certainly missing out on sales to already qualified accountants. There is so much bang for buck in textbooks too. Not sure on ICAEW equivalents, can't say that I've seen any for sale. Nor recommended. I guess much of that is due to study said qualification you need a training contract.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I've got some ICAEW study texts (Ebay and Amazon reseller aquisitions of the management accounting and Audit texts and question banks). Have to say though that they are a lot more basic (and shorter) than the ACCA texts which makes me think that ICAEW people are expected far more to read around subjects than believing that they will find everything for a paper in a single text (at least I hope thats the case or people have got ACA and ACCA completely the wrong way around).
I don't know if you have seen the Kaplan text for P6 but it makes two to the BPP version. I know that quantity isn't everything but when you come to get your next version I would highly recommend the Kaplan text (the Kaplan Pro Forma are quite often different to the BPP one's so there is some relearning of what you already know involved... i.e. the layout of the personal tax computation. Kaplan is similar to Melville which I think is more logical and easier to work with in an exam than BPP's layout).
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
No, as of yet I've only really used BPP for advanced learning. I have used Kaplan whilst studying AAT. I'll probably use Kaplan again for CIMA for the connection between the two, should I go that way. Don't BPP pay x amount to ACCA to be their main publisher? Or at least have done so. I also know they both provide for ATT, although I'm thinking tolleys have the edge there.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I am concerned that you still think that losses can be "taken into a company" per the thread title and used to offset taxable profits in that company. I don't have the study texts you both refer to above.
However both Shaun and I stated that the losses could be offset against income "from the company". So for example dividends on which tax has already been paid in the company.
I didn't say that - Did I? Where I say taken forward from sole trader to ltd, I mention shares. If I did say as per what you say I said, then yes I'm wrong. But I didn't, did I? Again if I did, I apologise. It was a post for clarification, rather than a question per se.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I've resisted asking this question because I didn't want to appear thick
What benefit does the Shareholder gain? My understanding from this thread is that he's allowed to bring the losses into the Company by way of shares. Is it that these shares don't need to be paid for? Otherwise whether he has one share or a million shares his dividend payout is exactly the same.
Discalimer: I haven't read the relevant papers Shaun and yourself relate to, but without study they would probably be over my head. I'm just curious.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
The carry-forward relief for losses in S86 is against income derived by the participator, such as salary / dividends. Again, how I see it. I'll be told if I'm wrong :p. AFAIK shares need to make up either 75 - 80%. It's one of those tricky decisions during transition of SE to Ltd. I'm still learning the methods of incorporation myself - just when you think you know the answer lol
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Shaun, I know it is written on the guidance that it should be 80%, yet in the act it states wholly or mainly - now if someone was willing to go through tribunals, could it be argued that anything above 51% is wholly?? Just a thought
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I knew I would come across as thick, I'm still not getting it.
How does it work? Say there were losses of 10k in the ST, does the shareholder take 10k worth of shares, without paying for them? Or is it that he has to have between a 80 and 100% shareholding in the Ltd Co, and then he can offset the loss against the 1st 10k of income above the personal allowance?
I can't see how he benefits from dividends as theres no tax on them at present at the basic rate
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
I've been quite light touch on this thread as its one of those subjects that really belongs on Aweb rather than here.
That said it doesn't hurt for people to have a general understanding of what is involved so that they are better able to advise their clients that an accountant needs to be involved.
its one of those areas that seems strtaight forwards but has lots of added complexity. As a pointer there are 150 pages of the Kaplan study text for P6 dedicated to this area and it still only touches the surface.
Incorporation relief is only one of the elements that needs to be considered along with other reliefs, VAT, IHT, closing year rules, SDLT and CGT implications.
As you say, the value of the business is transferred to the new company. At least 80% of the value must be in shares and only that percentage is available in relief. The percentage variance is generally any cash balance that existed in the unincorporated entity.
In your example of £10k losses that could not be relieved in any other way at incorporation, that would be relieved against the first income from the newly incorporated entity. It is very likely that the losses will result in the wasting of the personal allowance for the period.
The part where you seem to have gone wrong in your post is that the losses are used in calculating the net income which is before the personal allowance is applied so as I say, use of losses (which is non optional and must be used to the maximum amount that can be used for the period) may result in the wasting of the personal allowance.
On the dividends front that you question the benefit is on 25.8% NI (EMPE & EMPR) that would be payable if taken as salary. There is no tax advantage.
kindest regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I'm still lost on how it benefits the shareholder, but I didn't realise the complexity of it. It's something I wouldn't get involved myself with but I was just curious (not that curious to wade through 150 pages though!!)
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
If your bring forwards a £10k loss that you will lose through loss of the PA then no point at all.
If you are bringing forwards a £100k loss and expect to take a substantial income from the incorporated version of the business then there are both NI and tax savings to be had.
As hinted at in my above response there are also other reliefs and tax considerations and good tax planning (which I don't claim to be an expert at) involves finding the right combination of the various reliefs and other considerations for the taxpayer concerned.
Its certainly one of those area where I do not think that it can be approached with a formulaeic approach as every taxpayers situation is that little bit different and we need to consider the big picture to ensure that they achieve the most tax efficient outcome for them.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
