Sole trader to Ltd Company with Bounce Back Loan?

Jeremy535897

CKhalvashi said:

newdriver101 said:

You would need to speak to the bank (+ your accountant) - not sure if you can simply cease trading as a sole trader if you have an existing debt in place.  I suspect you will have to maintain the sole trader business just to pay back the debt and set up a brand new limited company...

Surely incorporation would make it exactly what it is already though in law, which is a personal debt.

This would presumably be dealt with as part of any asset sale to the Ltd anyway, which is in any event (subject to everything being at a fair market value) good tax planning in addition.

The conditions for the BBL relating to trading were those relevant at the date of the application. There will be sole trader businesses that cease to trade, and the sole trader will remain liable for the BBL. It will depend on the terms and conditions as to whether the bank can demand immediate repayment if the business ceases to trade (whether by transfer to a limited company or otherwise). That is why I suggest talking to the bank before doing anything.

At best what will happen is that OP will remain personally responsible for the BBL. When you transfer a trade to a limited company, you transfer assets because that is within your powers. Transferring a liability is at the discretion of the lender. For the reasons I gave earlier, that is not likely to happen with a BBL. It can also lead to tax liabilities.

Advice will also need to be taken on how to obtain tax relief on future interest payments. It is hard to see how this will be available if the BBL is in OP's name and the trade is in a company.

warby68

There is still the added complication that the BBL is not actually in your sole name, its in the name of your now defunct partnership.
You will need advice from bank, accountants and possibly solicitors given your arrangement to pay off ex partner to structure well. There may be a danger of over-complication in that the administration becomes more expensive than any tax benefits.
It may be that  the partnership should continue to exist and receive whatever payments can be made due to it , perhaps by a new limited company repaying a loan for the transfer of assets which in turn allows the BBL and ex partner to be repaid. Its not clear whether your sole trader status actually got up and running and whether you informed bank at that stage or whether that's yet to happen.
BBL is not your only issue here - the structure is quite complex from a banking viewpoint even without BBL for a single person business. To provide facilities to your new limited company it has to take into account recourse (where are the business assets, formerly partnership) and to you personally as well as the extra commitment that it will indirectly have to service in paying your ex partner out which you said is over many years. Your business is now an inherently 'weaker' entity in that 50% of its capital has been or is being removed with nothing in return.

CKhalvashi

warby68 said:

There is still the added complication that the BBL is not actually in your sole name, its in the name of your now defunct partnership.
You will need advice from bank, accountants and possibly solicitors given your arrangement to pay off ex partner to structure well. There may be a danger of over-complication in that the administration becomes more expensive than any tax benefits.
It may be that  the partnership should continue to exist and receive whatever payments can be made due to it , perhaps by a new limited company repaying a loan for the transfer of assets which in turn allows the BBL and ex partner to be repaid. Its not clear whether your sole trader status actually got up and running and whether you informed bank at that stage or whether that's yet to happen.
BBL is not your only issue here - the structure is quite complex from a banking viewpoint even without BBL for a single person business. To provide facilities to your new limited company it has to take into account recourse (where are the business assets, formerly partnership) and to you personally as well as the extra commitment that it will indirectly have to service in paying your ex partner out which you said is over many years. Your business is now an inherently 'weaker' entity in that 50% of its capital has been or is being removed with nothing in return.

At risk of complicating this more, but trying to simplify it, the partnership buy out would be (in the case of a Ltd) nothing more than a buyback of shares. It makes more sense to do this before any form of incorporation takes place from any standpoint than after.

The extra commitment spoken of would partially be offset by OP not needing to fund a second partnership drawing every year.

The business would be weaker in any event, however as I'd see this, an agreement would be in place between OP and the new company which transfers assets used in the new company, including any cash, at a fixed price. This would then show as a debt on the balance sheet of the new company to OP, and from OP's personal end any profit would be subject to Capital Gains Tax at 10% (with ER) over their allowance. This is not a debate I'm willing to get involved in over a forum and an issue that I'm not qualified to advise on in any event, so OP should seek advice on this from a professional.

The BBL (subject to any lender agreeing, probably with a charge over company assets) would remain in OP's name, which theoretically if there are sufficient assets to cover this on the transfer can be repaid as normal without tax (as there isn't tax on a loan repayment, which the asset transfer will be).

If OP is going into the 40% tax bracket by a significant margin and running a capital intensive business, selling the business to a Ltd company may be a strategy that is both good tax planning and a good way to manage the buyout in the long run.

unholyangel

CKhalvashi said:

warby68 said:

There is still the added complication that the BBL is not actually in your sole name, its in the name of your now defunct partnership.
You will need advice from bank, accountants and possibly solicitors given your arrangement to pay off ex partner to structure well. There may be a danger of over-complication in that the administration becomes more expensive than any tax benefits.
It may be that  the partnership should continue to exist and receive whatever payments can be made due to it , perhaps by a new limited company repaying a loan for the transfer of assets which in turn allows the BBL and ex partner to be repaid. Its not clear whether your sole trader status actually got up and running and whether you informed bank at that stage or whether that's yet to happen.
BBL is not your only issue here - the structure is quite complex from a banking viewpoint even without BBL for a single person business. To provide facilities to your new limited company it has to take into account recourse (where are the business assets, formerly partnership) and to you personally as well as the extra commitment that it will indirectly have to service in paying your ex partner out which you said is over many years. Your business is now an inherently 'weaker' entity in that 50% of its capital has been or is being removed with nothing in return.

At risk of complicating this more, but trying to simplify it, the partnership buy out would be (in the case of a Ltd) nothing more than a buyback of shares. It makes more sense to do this before any form of incorporation takes place from any standpoint than after.

The extra commitment spoken of would partially be offset by OP not needing to fund a second partnership drawing every year.

The business would be weaker in any event, however as I'd see this, an agreement would be in place between OP and the new company which transfers assets used in the new company, including any cash, at a fixed price. This would then show as a debt on the balance sheet of the new company to OP, and from OP's personal end any profit would be subject to Capital Gains Tax at 10% (with ER) over their allowance. This is not a debate I'm willing to get involved in over a forum and an issue that I'm not qualified to advise on in any event, so OP should seek advice on this from a professional.

The BBL (subject to any lender agreeing, probably with a charge over company assets) would remain in OP's name, which theoretically if there are sufficient assets to cover this on the transfer can be repaid as normal without tax (as there isn't tax on a loan repayment, which the asset transfer will be).

If OP is going into the 40% tax bracket by a significant margin and running a capital intensive business, selling the business to a Ltd company may be a strategy that is both good tax planning and a good way to manage the buyout in the long run.

If (in your 2nd last paragraph) you mean the OP could pay the BBL from the ltd company, they could....but they'd need to report it as salary/dividends/dla, which would have personal tax implications for the OP. 

It's also not advisable from a legal viewpoint, to blur the line between limited company funds and personal funds. The more the business owner blurs that line, the more chance a court will too and the owner won't have limited liability. Something even a lot of accountants aren't aware of. 

CKhalvashi

unholyangel said:

CKhalvashi said:

warby68 said:

There is still the added complication that the BBL is not actually in your sole name, its in the name of your now defunct partnership.
You will need advice from bank, accountants and possibly solicitors given your arrangement to pay off ex partner to structure well. There may be a danger of over-complication in that the administration becomes more expensive than any tax benefits.
It may be that  the partnership should continue to exist and receive whatever payments can be made due to it , perhaps by a new limited company repaying a loan for the transfer of assets which in turn allows the BBL and ex partner to be repaid. Its not clear whether your sole trader status actually got up and running and whether you informed bank at that stage or whether that's yet to happen.
BBL is not your only issue here - the structure is quite complex from a banking viewpoint even without BBL for a single person business. To provide facilities to your new limited company it has to take into account recourse (where are the business assets, formerly partnership) and to you personally as well as the extra commitment that it will indirectly have to service in paying your ex partner out which you said is over many years. Your business is now an inherently 'weaker' entity in that 50% of its capital has been or is being removed with nothing in return.

At risk of complicating this more, but trying to simplify it, the partnership buy out would be (in the case of a Ltd) nothing more than a buyback of shares. It makes more sense to do this before any form of incorporation takes place from any standpoint than after.

The extra commitment spoken of would partially be offset by OP not needing to fund a second partnership drawing every year.

The business would be weaker in any event, however as I'd see this, an agreement would be in place between OP and the new company which transfers assets used in the new company, including any cash, at a fixed price. This would then show as a debt on the balance sheet of the new company to OP, and from OP's personal end any profit would be subject to Capital Gains Tax at 10% (with ER) over their allowance. This is not a debate I'm willing to get involved in over a forum and an issue that I'm not qualified to advise on in any event, so OP should seek advice on this from a professional.

The BBL (subject to any lender agreeing, probably with a charge over company assets) would remain in OP's name, which theoretically if there are sufficient assets to cover this on the transfer can be repaid as normal without tax (as there isn't tax on a loan repayment, which the asset transfer will be).

If OP is going into the 40% tax bracket by a significant margin and running a capital intensive business, selling the business to a Ltd company may be a strategy that is both good tax planning and a good way to manage the buyout in the long run.

If (in your 2nd last paragraph) you mean the OP could pay the BBL from the ltd company, they could....but they'd need to report it as salary/dividends/dla, which would have personal tax implications for the OP. 

It's also not advisable from a legal viewpoint, to blur the line between limited company funds and personal funds. The more the business owner blurs that line, the more chance a court will too and the owner won't have limited liability. Something even a lot of accountants aren't aware of. 

Except it wouldn't.

A typical sole trader to Ltd involves a sale of the business to the company (which would largely cover assets at their current market value), which would create funds payable to OP by NewCo, which therefore would provide funds to repay the BBL.

This would in itself not in any way blur the line between company funds and OP's funds, and also at no point would create a tax liability, being repayment of a debt owed to the OP rather than salary/dividends.

Purely theoretical numbers here, but if the business is fairly valued at £100k when transferred into the company, OP would be owed £100k by the company, which then could be used to repay a £50k BBL. This would be subject to CGT at the applicable rates (usually 10% over annual allowance if ER is applicable), but wouldn't be taxed again.

Full details can be found here, however as always with something like this, OP will need their own financial advice.

unholyangel

CKhalvashi said:

unholyangel said:

CKhalvashi said:

warby68 said:

There is still the added complication that the BBL is not actually in your sole name, its in the name of your now defunct partnership.
You will need advice from bank, accountants and possibly solicitors given your arrangement to pay off ex partner to structure well. There may be a danger of over-complication in that the administration becomes more expensive than any tax benefits.
It may be that  the partnership should continue to exist and receive whatever payments can be made due to it , perhaps by a new limited company repaying a loan for the transfer of assets which in turn allows the BBL and ex partner to be repaid. Its not clear whether your sole trader status actually got up and running and whether you informed bank at that stage or whether that's yet to happen.
BBL is not your only issue here - the structure is quite complex from a banking viewpoint even without BBL for a single person business. To provide facilities to your new limited company it has to take into account recourse (where are the business assets, formerly partnership) and to you personally as well as the extra commitment that it will indirectly have to service in paying your ex partner out which you said is over many years. Your business is now an inherently 'weaker' entity in that 50% of its capital has been or is being removed with nothing in return.

At risk of complicating this more, but trying to simplify it, the partnership buy out would be (in the case of a Ltd) nothing more than a buyback of shares. It makes more sense to do this before any form of incorporation takes place from any standpoint than after.

The extra commitment spoken of would partially be offset by OP not needing to fund a second partnership drawing every year.

The business would be weaker in any event, however as I'd see this, an agreement would be in place between OP and the new company which transfers assets used in the new company, including any cash, at a fixed price. This would then show as a debt on the balance sheet of the new company to OP, and from OP's personal end any profit would be subject to Capital Gains Tax at 10% (with ER) over their allowance. This is not a debate I'm willing to get involved in over a forum and an issue that I'm not qualified to advise on in any event, so OP should seek advice on this from a professional.

The BBL (subject to any lender agreeing, probably with a charge over company assets) would remain in OP's name, which theoretically if there are sufficient assets to cover this on the transfer can be repaid as normal without tax (as there isn't tax on a loan repayment, which the asset transfer will be).

If OP is going into the 40% tax bracket by a significant margin and running a capital intensive business, selling the business to a Ltd company may be a strategy that is both good tax planning and a good way to manage the buyout in the long run.

If (in your 2nd last paragraph) you mean the OP could pay the BBL from the ltd company, they could....but they'd need to report it as salary/dividends/dla, which would have personal tax implications for the OP. 

It's also not advisable from a legal viewpoint, to blur the line between limited company funds and personal funds. The more the business owner blurs that line, the more chance a court will too and the owner won't have limited liability. Something even a lot of accountants aren't aware of. 

Except it wouldn't.

A typical sole trader to Ltd involves a sale of the business to the company (which would largely cover assets at their current market value), which would create funds payable to OP by NewCo, which therefore would provide funds to repay the BBL.

This would in itself not in any way blur the line between company funds and OP's funds, and also at no point would create a tax liability, being repayment of a debt owed to the OP rather than salary/dividends.

Purely theoretical numbers here, but if the business is fairly valued at £100k when transferred into the company, OP would be owed £100k by the company, which then could be used to repay a £50k BBL. This would be subject to CGT at the applicable rates (usually 10% over annual allowance if ER is applicable), but wouldn't be taxed again.

Full details can be found here, however as always with something like this, OP will need their own financial advice.

Yes, so OP has to repay BBL + CGT. As you highlighted though, the funds to make that initial purchase needs to come from somewhere. What's the tax position on the income the OP would use to repay the BBL if they remained a sole trader though? 

I could've been clearer, that my 2nd paragraph (about lifting the veil) wasn't really in reply to you (sorry, tend to split my posts like that) because I got the impression from OP they were intending on making repayments from ltd company revenue. OP seems to think it will be tax efficient. Granted we don't know the specifics, but if we warn OP of the pitfalls then it gives them something to consider - if they haven't already. IMO though, sole trader v ltd company is comparing apples and oranges. Added costs, responsibilities (companies house/director duties, extra tax filings etc), and also potential tax paid later on when you do withdraw them (if they're still there to withdraw).....it can be tax efficient, but it largely depends on circumstances and your powers of clairvoyance. 

CKhalvashi

unholyangel said:

CKhalvashi said:

unholyangel said:

CKhalvashi said:

warby68 said:

There is still the added complication that the BBL is not actually in your sole name, its in the name of your now defunct partnership.
You will need advice from bank, accountants and possibly solicitors given your arrangement to pay off ex partner to structure well. There may be a danger of over-complication in that the administration becomes more expensive than any tax benefits.
It may be that  the partnership should continue to exist and receive whatever payments can be made due to it , perhaps by a new limited company repaying a loan for the transfer of assets which in turn allows the BBL and ex partner to be repaid. Its not clear whether your sole trader status actually got up and running and whether you informed bank at that stage or whether that's yet to happen.
BBL is not your only issue here - the structure is quite complex from a banking viewpoint even without BBL for a single person business. To provide facilities to your new limited company it has to take into account recourse (where are the business assets, formerly partnership) and to you personally as well as the extra commitment that it will indirectly have to service in paying your ex partner out which you said is over many years. Your business is now an inherently 'weaker' entity in that 50% of its capital has been or is being removed with nothing in return.

At risk of complicating this more, but trying to simplify it, the partnership buy out would be (in the case of a Ltd) nothing more than a buyback of shares. It makes more sense to do this before any form of incorporation takes place from any standpoint than after.

The extra commitment spoken of would partially be offset by OP not needing to fund a second partnership drawing every year.

The business would be weaker in any event, however as I'd see this, an agreement would be in place between OP and the new company which transfers assets used in the new company, including any cash, at a fixed price. This would then show as a debt on the balance sheet of the new company to OP, and from OP's personal end any profit would be subject to Capital Gains Tax at 10% (with ER) over their allowance. This is not a debate I'm willing to get involved in over a forum and an issue that I'm not qualified to advise on in any event, so OP should seek advice on this from a professional.

The BBL (subject to any lender agreeing, probably with a charge over company assets) would remain in OP's name, which theoretically if there are sufficient assets to cover this on the transfer can be repaid as normal without tax (as there isn't tax on a loan repayment, which the asset transfer will be).

If OP is going into the 40% tax bracket by a significant margin and running a capital intensive business, selling the business to a Ltd company may be a strategy that is both good tax planning and a good way to manage the buyout in the long run.

If (in your 2nd last paragraph) you mean the OP could pay the BBL from the ltd company, they could....but they'd need to report it as salary/dividends/dla, which would have personal tax implications for the OP. 

It's also not advisable from a legal viewpoint, to blur the line between limited company funds and personal funds. The more the business owner blurs that line, the more chance a court will too and the owner won't have limited liability. Something even a lot of accountants aren't aware of. 

Except it wouldn't.

A typical sole trader to Ltd involves a sale of the business to the company (which would largely cover assets at their current market value), which would create funds payable to OP by NewCo, which therefore would provide funds to repay the BBL.

This would in itself not in any way blur the line between company funds and OP's funds, and also at no point would create a tax liability, being repayment of a debt owed to the OP rather than salary/dividends.

Purely theoretical numbers here, but if the business is fairly valued at £100k when transferred into the company, OP would be owed £100k by the company, which then could be used to repay a £50k BBL. This would be subject to CGT at the applicable rates (usually 10% over annual allowance if ER is applicable), but wouldn't be taxed again.

Full details can be found here, however as always with something like this, OP will need their own financial advice.

Yes, so OP has to repay BBL + CGT. As you highlighted though, the funds to make that initial purchase needs to come from somewhere. What's the tax position on the income the OP would use to repay the BBL if they remained a sole trader though? 

I could've been clearer, that my 2nd paragraph (about lifting the veil) wasn't really in reply to you (sorry, tend to split my posts like that) because I got the impression from OP they were intending on making repayments from ltd company revenue. OP seems to think it will be tax efficient. Granted we don't know the specifics, but if we warn OP of the pitfalls then it gives them something to consider - if they haven't already. IMO though, sole trader v ltd company is comparing apples and oranges. Added costs, responsibilities (companies house/director duties, extra tax filings etc), and also potential tax paid later on when you do withdraw them (if they're still there to withdraw).....it can be tax efficient, but it largely depends on circumstances and your powers of clairvoyance. 

No problem, my post was simply a proposition for how such a deal could be structured to get around that issue. Of course, for legal reasons my post is theoretical rather than advice and may not be suitable for OP, but a deal structured in this way is quite a common arrangement in practice.

Of course we agree that it's not a good idea to use company funds to pay personal debts, and that should have been made clearer.

To also be completely clear, OP needs to seek advice from a professional before entering into any arrangement of this nature, as asset valuations and the value of any intangible assets will need to be at a fair market value and nobody here is able to provide you with guidance on this.