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Post Info TOPIC: Transferring assets from Sole Trader to Ltd Company.


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Transferring assets from Sole Trader to Ltd Company.


The person I do accounts for is changing from a sole trader to a Ltd Company.

There are apprximately £26k of assets to transfer, but equally an £18k bank loan and a £7.5k private loan made by a seperate individual  to deduct from it.  plus £3k owed to sole trader on bills he has covered himself using personal credit card.  The assets are mainly made up of £15k goodwill and £9.5k in vehicles.

We want the new company to take over the repayments and I understand an assignment of interest to the Company can be done to do this.

As far as sole trader is concerned based on the assets transferred he would incur approx £3k cgt.  Can the bank loan and private loan be taken into account thus cancelling the assets out, if not, can his losses for last year be used to reduce cgt?

Regarding the 3k owed to the sole trader, can I show this in the company accounts as a directors loan, so he can get his money back over time?

He does not have an accountant at present as I am competent to finalise his sole trader accounts and complete his tax return.  He is undecided at present whether to obtain an accountant, or invest that money in me to become qualified.

I have done Limited Company accounts in the past, and was deemed accurate and competent by the Accountant that firm used, it is just this transfer of assets that I need help with.



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gbm


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Hi John,

Quite a bit to go at here!

Re CGT - would have thought the base cost for vehicles would have been higher than value at transfer. Goodwill would be subject to ent relief @ 10%, so £1.5k. How did you value the goodwill? Have you passed it with HMRC yet?

The loans can't be taken into account with the CGT.

Re losses - can they be carried back? It's unusual to make losses, then incorporate (especially with goodwill), although I guess it could be done if assets were purchased under the AIA.

Re £3k - is that a loan or capital introduced?

I personally think there are a few issues here, and would suggest you pay a local accountant for a couple of hours to review the transfer and advise accordingly.

Compliance is one thing, advice and planning another.

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Nick

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gbm wrote:

Hi John,

Quite a bit to go at here!

Re CGT - would have thought the base cost for vehicles would have been higher than value at transfer. Goodwill would be subject to ent relief @ 10%, so £1.5k. How did you value the goodwill? Have you passed it with HMRC yet?

Goodwill is a taxi plate which I was told initially could not be regarded as a fixed asset, and to treat it as goodwill.  Unless the local council degregulate, it will always be worth that amount.  I have taken the value of the vehicles as they appear on the fixed asset sheet, after allowing for this years write down.

The loans can't be taken into account with the CGT.

Re losses - can they be carried back? It's unusual to make losses, then incorporate (especially with goodwill), although I guess it could be done if assets were purchased under the AIA.

Last year the business made a made a slight loss, off the top of my head about 2.5k.  The loss carried forward would be against his sole trader account, not the ltd company.

Re £3k - is that a loan or capital introduced?

A loan,  He simply used his own credit card to pay a hefty garage bill planning to claim it back later.  I have advised him to avoid doing that wherever possible, especially once he goes limited.

I personally think there are a few issues here, and would suggest you pay a local accountant for a couple of hours to review the transfer and advise accordingly.

Compliance is one thing, advice and planning another.

OK thanks for that, I acknowledge what you are saying, and will advise him to do that.


 

 



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Hi John

As Nick says quite a lot in your post.  Following up from your original post, nicks reply and your follow up would say the following

1. Unusual that a taxi licence is treated as goodwill.  I would say that it is a fixed asset. 

2. The value of the vehicle shouldnt be transferred at the net book value in the accounts but what they are worth if they were sold at arm's length.  A good guide for their worth would be parkers which you can view online.

3. The loans could be brought into the business if the company agreed to take them on but they couldnt be used to offset the personal CGT liabilty.  Equally the trading loss couldnt be used against the capital gain.  Only capital losses can be used to offset capital gains from a personal tax viewpoint.

4. Dont see how the £3k loan can be shown in the company.  If the owner paid for the expense personally in the sole trader then cant be a loan.  A sole trader cant owe themselves money.  It would have been capital introduced.  It appears that the monies spent are to cover costs of the sole trader so nothing to do with the proposed limited company.

5. Like Nick would advise your client to get a qualified accountant to go through everything and ensure everything is done correctly at the start.  It can be costly trying to recify mistakes that you unwittingly made yourself.

 

Regards

 

MarkS



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Morning John,

I think Mark has done a good job of the reply so I will restrict my response to just a couple of points that I think needs to be further picked up on.

Your client is seeking to go limited and transfer in a loan. This of course is dependant upon the lending provider agreeing to such. If they are actually just looking at the payments coming out of the company and expecting the veil of incorporation to protect them then they are wrong.

Assuming that this is a bank loan, the bank would want personal guarantee from the owner for the loan,

The loan as initially taken out would need to be shown to be wholly, necessarily and exclusively for the purposes of the business otherwise the payments would not be allowed frrom the company.

The banks likely approach IF they will permit the new company to have a loan (the owner will need to have sufficient equity to guarantee any loan) is to expect the company to take out a new loan and then it is down to the owner to settle the existing loan prior to incorporation.

If the lending provider finds that the sole trader has gone limited and the loan repayments have simply been transferred to the new company then the lending provider is quite within their rights to call in the loan with immediate effect.

General advice on this one would be that if your client has not already done so they need to talk to their lending provider about the loan rather than make assumptions that they can simply transfer the payments when they transfer the assets.

On the assets point, the number plate is not goodwill as it is a tangible asset with a ready market (see IAS's 16 & 38 or FRS's 10 & 15).

I would go further and say that unlike the cars it is actually a non depreciating asset.

The whole number plate question made me wonder how other people treat them as my opinion is that a personal number plate is an investment and not neccessary to run a taxi business. I had a look over at the discussions by those clever people over on Accounting web and found this thread that you might find useful.

http://www.accountingweb.co.uk/item/38009

Back to going limited, one thing to ask yourself is why is this client incorporating? Personlly I'm all for incorporation but in this instance what is the motivation? If the client is seekng protection from creditors under the veil then they will be disappointed as the lending providers will tie the owner to personal guarantee's.

Good luck with this one.

kind regards,

Shaun.




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Responses are not meant as a substitute for professional advice. Answers are intended as outline only and in all situations the advice of a qualified professional should be sought before acting on any response given.



Guru

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smile Shaun, a quick comment on your post, it's not a personal number plate, it's a taxi plate - it's the licence to use that car as a taxi.

This is quite an old link, but likely to be others on the site. http://www.accountingweb.co.uk/item/132394



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Cheers Jenny,

Two Oop's in two days! (yesterdays was giving AAT a promotion to being a CCAB member!).

I really should give the posts 100% of my attention when replying to them. Unfortunately I'm also revising for P2 and I'm waist deep in the original text plus goodness knows how many different interpretations of IAS16 at the moment (so I was probably reading a question that I wanted rather than the on ehtat was being asked.... Hope I don't do that in the exam!!!).

Ignoring the number plate bit though I've just had a read through and am pretty sure that the rest of my reply is quite valid though.

cheers again and talk in a bit,

Shaun.



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Responses are not meant as a substitute for professional advice. Answers are intended as outline only and in all situations the advice of a qualified professional should be sought before acting on any response given.



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MarkS wrote:

Hi John

As Nick says quite a lot in your post.  Following up from your original post, nicks reply and your follow up would say the following

1. Unusual that a taxi licence is treated as goodwill.  I would say that it is a fixed asset. 

The advice that it was goodwill was given by diy accounting when using their software when he first started out.

5. Like Nick would advise your client to get a qualified accountant to go through everything and ensure everything is done correctly at the start.  It can be costly trying to recify mistakes that you unwittingly made yourself.

Decided to do that, so I will leave it all in his capable hands.  There was obviously more involved than i realised and thanks to those that suggested an accountant.  The last thing i want to do is create headaches for him further down the line.

 

 



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Shamus wrote:

Morning John,

I think Mark has done a good job of the reply so I will restrict my response to just a couple of points that I think needs to be further picked up on.

Your client is seeking to go limited and transfer in a loan. This of course is dependant upon the lending provider agreeing to such. If they are actually just looking at the payments coming out of the company and expecting the veil of incorporation to protect them then they are wrong.

No, he is aware that he has personally guaranteed the loan as a sole trader.

Assuming that this is a bank loan, the bank would want personal guarantee from the owner for the loan,

The loan as initially taken out would need to be shown to be wholly, necessarily and exclusively for the purposes of the business otherwise the payments would not be allowed frrom the company.

It was, and paid straight into the sole traders business account.

The banks likely approach IF they will permit the new company to have a loan (the owner will need to have sufficient equity to guarantee any loan) is to expect the company to take out a new loan and then it is down to the owner to settle the existing loan prior to incorporation.

I have a feeling that the bank will simply be happy to leave it as it is as long as they get paid each month.  They are dealing with setting up the limited co account and closing the sole trader one down so I think they will just transfer all the old direct debits across etc.

As long as the Ltd company is able to pay it each month is there a problem accounting wise?

If the lending provider finds that the sole trader has gone limited and the loan repayments have simply been transferred to the new company then the lending provider is quite within their rights to call in the loan with immediate effect.

General advice on this one would be that if your client has not already done so they need to talk to their lending provider about the loan rather than make assumptions that they can simply transfer the payments when they transfer the assets.

I have asked him to clarify this with the bank.

On the assets point, the number plate is not goodwill as it is a tangible asset with a ready market (see IAS's 16 & 38 or FRS's 10 & 15).

I would go further and say that unlike the cars it is actually a non depreciating asset.

I would agree it is a non depreciating asset. the advice I was given at the start when deciding what to treat it as was to mark it as goodwill.

It is a taxi licence plate and because the council only allow x number of cars on the ranks, the plates are sold by taxi drivers when they want out of the business. Unless the council deregulate (in which case the plate becomes worthless overnight) it will retain it's original value.

Back to going limited, one thing to ask yourself is why is this client incorporating? Personlly I'm all for incorporation but in this instance what is the motivation? If the client is seekng protection from creditors under the veil then they will be disappointed as the lending providers will tie the owner to personal guarantee's.

Other than the bank and a private loan from a family member, he has no other creditors.  It is not being done to avoid any payments.  He wants to start going for council contracts etc and feels a ltd company will be better prestige wise.  He is serious about developing the business.  He will also be better off tax wise and can draw a salary. 

He has decided to get an accountant to do the transfer and also provide final accounts.

Thanks for your advice (and others who gave some)  It is much appreciated. 


 

 



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