Incorporating your company is a big, exciting step, but there’s a bit of a hill to climb first before you can enjoy the views. If you already run a business as a sole trader then a vital step in this process is planning what to do with your assets, and whether you want to transfer them over to your limited company.

It can be a bit confusing, so in this article we’ll discuss how assets are transferred to limited companies and what the tax implications are.

What are business assets?

Business assets are things the business owns or uses to create value. This can include anything from premises, equipment, machinery, intellectual property, or vehicles you use for business purposes.

Is incorporating my business good for my assets?

Unlike sole traders who aren’t distinct from their business, a limited company is a separate legal entity to you as the owner so incorporation can be a useful way to manage and protect assets depending on your personal circumstances. For example, company debts are just that – they belong to the company so personal assets like your car and your home are protected if your company faces financial difficulties.

Does every sole trader incorporate their business?

No. It’s completely up to you whether you want to incorporate your business, and you can remain as a sole trader if you prefer to. There are definitely things to think about before making a decision either way!

For example, sole traders who’ve seen growth may find it to be more tax efficient to run through a limited company, but this depends on your circumstances. Forming a company also means you’ll have more reporting obligations, and you’ll no longer be able to take money out of your business as and when you please.
 

What are the tax implications of transferring assets to a limited company?

Moving assets you own personally into a limited company can trigger Capital Gains Tax which you need to pay personally, as well as having an impact on the company’s tax bill through capital allowances. We explain all this in more detail below!

Capital Gains Tax if you transfer assets to a limited company

Moving personal assets to a limited company counts as a ‘disposal’, which means you’ve given up something of value and now the company owns it instead. Disposals are often subject to Capital Gains Tax on the difference between the asset’s value when you acquired it and when you disposed of it.

It’s why it’s so important to make sure you charge your company the true value of the asset! Selling it for less than the actual value might be seen as an attempt to avoid Capital Gains. You can estimate your bill using our online CGT calculator.

Claiming tax relief on assets your company owns

Transferring assets over to your limited company can be particularly beneficial if you expect them to stay in the business for more than a few years, because you’ll be able to claim Capital Allowances against them. This type of tax relief means you can deduct all or part of your asset’s value from your profits before you pay tax.

Transferring assets for tax planning

It’s sometimes useful to create a company and use it to own and grow family wealth in a more tax-efficient way – known as a Family Investment Company. We have a separate article dedicated to this type of set-up!

Identifying the assets you need to transfer

Before making any transfer moves, like football, it requires some planning. The first thing you need to do is identify all the assets you’d like to move over, such as:

• Business premises
• Computers, machinery, any type of equipment
• Trademarks, copyrights, etc

Once you’ve identified these things, you’ll be able to start the transfer process. It’s important to discuss the list with your accountant before moving forward, just to make sure transferring them to your limited company is the right thing to do. Remember that once they’ve been transferred, you’re no longer the owner – the limited company is.

How do I transfer my assets over to my limited company?

There are two ways you can transfer an asset to your limited company; either by a sale to the company, or by placing a credit on your director’s loan account (DLA).

Transferring assets to a company via a sale

A ‘sale’ is where you’ll sell your asset to your limited company at its market value. By market value, we mean the price it’d sell for at present in the marketplace, so you’ll need to compare the price of similar items that have been sold on the market recently. The company will then pay you, and this will be reflected in your accounts. Don’t forget about Capital Gains Tax!

Placing a credit on your Director’s Loan Account

If you’ve recently incorporated your limited company, it might not yet have funds available to purchase your assets via a sale.

Instead, you can place a ‘credit’ on your Directors Loan Account (DLA), which basically means the company owes you money for the assets it now owns. The credit will stay on your DLA until your company can afford to pay you back. A DLA can also be used to record personal money you withdraw from the business that isn’t a salary, dividend, or expense repayment.

Do I value my assets myself?

You don’t have to. You may have expensive assets or complex intellectual property that are just too tricky to valuate on your own. In this instance, you can hire a professional to value your assets for you.

What else to consider if you’re moving a sole trader business into a limited company

There might be other things you need to think about before registering a new limited company. For instance:

• If you have employees, you’ll need to issue new employment contracts showing your limited company as the employer, and update your PAYE records accordingly
• You may also need to review and update insurance policies
• It’s good practice to notify your clients and suppliers
• You’ll need to update other documents such as your invoices, website, and other marketing materials
• A big one is understanding your new tax obligations. You’ll now need to send Company Tax Returns and pay Corporation Tax – but you still may need to submit a Self Assessment too. For example, if you pay yourself dividends, or have untaxed income outside of your limited company

It’s important to speak to an accountant about this change, as they’ll be able to guide you through it step-by-step.

 
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