When a sole trader or partner in a firm transfers their business to a limited company, there are income tax implications for the individual on that transfer. These include:

  • closing year rules / overlap profits
    • capital allowances
  • stock
  • loss relief options

These are covered in further detail below.

Closing year rules

The incorporation of a business by a sole trader brings about a cessation of trade for income tax purposes. The closing year rules will therefore need to be considered, including relief for overlap profits.

In particular if the overlap profits are significantly greater than current profits for an equivalent time period the cessation of the trade may trigger a substantial loss for which no relief is available. Careful choice of cessation date may help with this issue.

See Example 1 and Example 2 for illustrations of cessation planning. For more guidance on this see the Closing years guidance note.

Capital allowances

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