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Business Incorporations and Share SchemesCapital Gains TaxIncorporation ReliefGift ReliefStamp Duty Land Tax

ACCA · Question 03 · Business Incorporations and Share Schemes

SECTION B: ADVISORY REPORT

You are a tax advisor to Nexus Cyber-Security LLP ('Nexus'), a highly successful partnership owned equally by three partners: Alice, Bob, and Charlie. The LLP develops bespoke cybersecurity software for financial institutions.

To attract external venture capital and incentivize key staff, the partners have decided to incorporate the business into a new limited company, 'Nexus Cyber Ltd', on 1 January 2025.

The current market value of the LLP's assets is:

  • Goodwill: £3,000,000 (internally generated, nil base cost)
  • Freehold Office Building: £1,200,000 (original cost £500,000)
  • Cash at bank: £400,000

The partners are considering two incorporation routes:
Route 1: Transfer all assets (except cash) to Nexus Cyber Ltd in exchange wholly for shares in the new company.
Route 2: Transfer the Goodwill to Nexus Cyber Ltd in exchange for shares, but retain the Freehold Office Building outside the company, leasing it to Nexus Cyber Ltd on a commercial basis.

Following incorporation, Nexus Cyber Ltd intends to implement an Enterprise Management Incentive (EMI) scheme to grant share options to five key software engineers. The company's gross assets post-incorporation will be under £5 million, and it will have 45 employees.

REQUIREMENT:
Prepare a report for the partners of Nexus Cyber-Security LLP advising on:
(a) The Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications of Route 1 versus Route 2, specifically comparing Section 162 Incorporation Relief and Section 165 Gift Relief. Advise on the most tax-efficient route. (15 marks)
(b) The qualifying conditions for the proposed EMI scheme and the Income Tax, National Insurance, and CGT benefits for the five key software engineers upon the grant, exercise, and eventual sale of the EMI shares. (10 marks)

How to approach this question

For Part A, contrast s.162 (requires ALL assets, automatic, rolls gain into shares) with s.165 (can pick and choose assets, requires election, rolls gain into the asset for the company). Address SDLT on partnership incorporations (often nil due to connected party rules). For Part B, list the company limits for EMI (£30m assets, 250 staff) and walk through the timeline: Grant (no tax) -> Exercise (no tax if strike price = MV) -> Sale (CGT at 10% via BADR, noting the special relaxed rules for EMI).

Full Answer

This question tests the mechanics of incorporating a business. S.162 is the default statutory relief, but it forces all assets into the company. S.165 is often preferred by advisors because it allows property to be kept outside the company, avoiding double taxation later. The EMI section tests knowledge of the UK's most generous employee share scheme, specifically the interaction between EMI and Business Asset Disposal Relief (BADR).

Common mistakes

Students often confuse the mechanics of s.162 and s.165. S.162 reduces the base cost of the *shares* the partners receive. S.165 reduces the base cost of the *asset* in the hands of the company. Another common error is applying standard SDLT rates to the property transfer, forgetting the special rules for transfers from a partnership to a connected company which usually reduce the charge to nil.
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