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Introduction to this document

Election to transfer stock at less than market value

When an unincorporated business is transferred to a company, any stock (or works in progress for service businesses) is deemed to be sold to the company at market value (MV). This will usually be higher than the original cost, and so a notional profit can arise. This has to be included in the final accounts of the sole trade/partnership, and so can give rise to a tax bill. An election can be made to treat the stock as transferred at cost.

Example

Jack owns and runs a business as a wholesaler. He intends to transfer the trade to a company in which he is the only director shareholder. The stock on hand cost £75,000, but its MV is £175,000. This figure is used to work out the taxable profit for the final period of trading of the unincorporated business, which adds £100,000 (£175,000 - £75,000) to Jack’s taxable profit.

Under s.178 Income Tax (Trading and Other Income) Act 2005 two businesses which are connected for tax purposes can make a joint election so that the transfer is treated as made at the higher of cost and the amount paid for the stock by the transferee. In the example Jack and his company can make an election to treat the stock as transferred at cost (£75,000). This means there would be no addition to Jack’s taxable profit resulting from the transfer. The company is treated as acquiring the stock for £75,000.

When to make the election

The election must be made in writing on or before the first anniversary of the normal self-assessment filing date for the tax year in which the cessation of the transferor’s business occurred.

For example, if a business ceased trade on 1 May 2016 (2016/17) the election must be made on or before 31 January 2019.