Income tax implications of incorporation

Produced by Tolley in association with

Owner-Managed Businesses

Guidance

The Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the income tax aspects which include:

•
closing year rules / overlap profits which are relevant prior to the basis period reforms
•
capital allowances
•
stock
•
loss relief options

These are covered further detail below.

Closing year rules

The incorporation of a business by a sole trader or partnership brings about a cessation of trade for income tax purposes. The closing year rules for basis periods will therefore need to be considered for incorporations in the tax years up to and including 2023/24, including relief for overlap profits, see the Basis period (old rules) ― closing years guidance note.

Prior to the abolition of basis periods, if the overlap profits were significantly greater than current profits for an equivalent time period, the cessation of the trade could trigger a substantial loss for which no relief is available. Careful choice of cessation date could help with this issue.

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Julie Butler

Managing Partner at Butler & Co Chartered Accountants & Registered Auditors

Julie Butler FCA is the founding director of Butler & Co Chartered Accountants, a firm that specialises in agricultural and land matters. Julie has lectured extensively on proactive tax planning for farmers and landowners, with an emphasis on diversification and development.Julie and her team provide tax consultancy services direct to the farming and equine industry and to other accountants, land agents and solicitors on farming diversification, bloodstock and all areas of the equine world.Julie's articles are published in the national accountancy and tax press and she is the author of the successful books Tax Planning for Farm and Land Diversification and Equine Tax Planning as well as being co-author of Stanley: Taxation of Farmers and Landowners with Malcolm Gunn. Julie is also editor of Farm Tax Brief and contributes to Tolley's Tax Planning.Julie is an authorised individual licensed by the ICAEW to carry out the reserved legal activity of non-contentious probate in England and Wales.

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