ACCA ATX ^UK Syllabus A1. Income tax - Transfer of a business to a company - Notes ^{1 / 2}

Trading loss relief available

If the owner of a business transfers that business to a limited company, there is a change in the legal ownership of the business and the seller is deemed to have stopped trading. 

Any trading loss which the seller still has before the date of transfer cannot be carried forward and set against the company’s trading profits.

However, there is a relief that the sole trader can use if their business is transferred to a limited company, provided that the following conditions are met:

1. The consideration is wholly or mainly in exchange for shares in that company (≥ 80% of the consideration must be in shares).

2. The seller of the business continues to hold those shares throughout the tax year in which the relief is given.

3. The company continues to carry on the transferred business.

Then the seller may set unrelieved trading losses against the first available income that he or she receives from the company in the most tax efficient manner. 

For example, if the seller receives dividends from the company, then they can set the unrelieved trading loss off against the first dividend received.

Illustration

Jake transferred his manufacturing business to Jim Ltd. for 10,000 shares in the company which he intends to hold for many years.

When he transferred his business, there were unrelieved trading losses of (£20,000).

Jim Ltd. is continuing the manufacturing business. 

Jake received dividends of £8,000 from the company. 

Can he relieve the trading loss?

• Solution

  Yes, he can as the following conditions are met:

  The consideration is wholly for shares. 

  Jake continues to hold those shares. 

  Jim Ltd. continues to carry on the transferred manufacturing business. 

  Loss Relief
  Dividends received £8,000
  C/f loss (£8,000)

  Loss to be carried forward £12,000 (£20,000-£8,000)