Election to transfer stock at less than market value

When an unincorporated business is transferred to a company with its stock and work in progress these are deemed to be transferred at net realisable value, broadly, the amount it could be sold for to a third party, often referred to as market value (MV). If this is higher than the cost the notional profit is taxable on the transferring business. To prevent this an election can be made to treat the stock as transferred at cost value.

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, for a business that ceased trade and was transferred on 1 May 2022 (2022/23) the election must be made on or before 31 January 2025.