As a sole trader you can save income tax by transferring your business to a company, but this can trigger other taxes. While these can usually be negated, there’s one tax that’s often overlooked. What is it and can you avoid it?

Pros and cons of incorporation

The main motive for sole traders to transfer their business to a company, otherwise known as “incorporating”, is tax saving. Despite changes to the rules in 2013 and 2014 which make it less advantageous, it can still be worthwhile. One hurdle to be cleared is the capital gains tax (CGT) that may be triggered by incorporation. The good news is that it can be legitimately dodged by making either one of two special claims.

Trap. Stamp duty and stamp duty land tax (SDLT) (or the equivalent in Scotland and Wales) can apply where land, buildings and some other types of asset are transferred as part of incorporation. These are very difficult to negate.

Transfer of land and buildings

A transfer of land or buildings to a private company in which you own or control all or a significant chunk of its share capital is treated as if it were a sale at market value with your company as the buyer. It’s therefore liable to SDLT etc. if the value exceeds the nil rate band. Example. Barry is a sole trader in England. He owns the freehold of its premises valued at £320,000. He forms Acom Ltd and transfers his business to it. Acom is liable to SDLT of £5,500 (£150,000 x 0% + £100,000 x 2% + £70,000 x 5%).

Dodging the tax

A simple solution for Barry is not to transfer the property to Acom and instead retain personal ownership. This means that one of the special claims to negate the CGT triggered by the incorporation process can’t be used. He can use the other claim to avoid any CGT but in doing so he’ll miss out on other future tax savings.

An alternative solution

The SDLT etc. rules include a little-known relief which allows a partnership which transfers land or buildings to a company to escape SDLT etc. The relief reduces the amount chargeable to SDLT etc. in proportion with the partners’ connection with the company. For example, if 50% of the partners are connected with the company to which the property is transferred (director shareholders are connected to their companies), their share of the property will not be subject to SDLT. Note. Spouses, civil partners and close family are connected persons for tax purposes. Therefore, if one spouse is connected to a company, say, because they are a director, the other spouse is also connected.

Tip. If a married couple are in partnership and property is transferred to a company, only one of them needs to be connected to it to obtain SDLT relief. This means that full relief is given whenever a family partnership transfers property to a company and at least one of the partners owns all the shares in it.

Trap. HMRC has tough anti-avoidance rules which allow it to disapply the relief where the creation of a partnership was for the purpose of dodging SDLT.

Tip. The longer your business operates as a partnership the less likely it is that HMRC will be able to refuse your claim for relief.

Stamp duty land tax (SDLT) and the Scottish and Welsh equivalents apply to the transfer of property with your business. If you retain personal ownership you can avoid it but this can lose you other tax advantages. Instead, turn your business into a partnership and later transfer that to a company. This can reduce or eliminate the SDLT etc.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.