When you change from a sole trader business structure to a limited company structure, there are many factors to consider and, if you're not careful, you may overlook what to do with your fixed assets for tax purposes and end up with an income tax charge. Your business fixed assets include your office equipment, fixtures and fittings, computers, etc and should be sitting in your accounts at their depreciated value, that is their net book value after charging a rate of depreciation reflective of the amount of time you expected to use those assets in your business.
However, for tax purposes, it is likely that you will have written off the value of those fixed assets in full when you bought them under the annual investment allowance and so in HMRC’s eyes, the assets are valued at £0. When you come to transfer those assets to another entity, the correct tax treatment is to record the market value of the assets at the date of sale, and this will be your profit on the transfer of those assets.
So for example, if your sole trader business ceased and you had computer equipment worth £1000 on which you had claimed full annual investment allowances, and which you decided to keep for yourself, you would record a balancing charge of £1000 on your self-assessment return which would then be subject to 20% income tax (if you are a basic rate taxpayer) plus Class 4 national insurance, leading to a tax bill of over £200.
However, if you transfer the fixed assets to your new limited company you can make an election to treat the assets as transferred at nil tax written down value, hence avoiding this charge. You should put the election in writing in the white space of your self-assessment return.
When you then go on to use the assets in your new limited company, you would complete the election again in the white space of your corporation tax return. This is an easy way to avoid a tax charge on the transfer of your assets and save you a tax charge of over £200.
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