Is Goodwill still a good thing?

You may have seen commentary, following the Autumn Statement, on the changes to the treatment of goodwill when a business is incorporated.

These changes will impact on business owners looking to claim Entrepreneurs Relief (“ER”) on the disposal of their business to a company.

Previous position

Prior to the Autumn Statement ER has been available to reduce capital gains tax (“CGT”)payable on gains arising on the incorporation of a business. Often the gain is enhanced by the value of the goodwill attaching to the business and this goodwill is usually transferred to the company along with the other assets of the trade.

The purchasing company is usually a new company set up by the seller to acquire the business and is unlikely to have the funds to pay for the assets transferred so it leaves the balance on an account within the company owing to the seller.

The seller will subsequently extract funds equal to that balance tax free and NIC free as the CGT has already been paid on the transfer of the assets (and ER claimed).

The company could claim tax relief for the cost of the goodwill under the corporate intangible assets regime.

New position

With effect from 3 December ER can’t apply to a gain arising on the transfer of goodwill to a close company, where that company is a “related party” to the seller. ER will continue to be available on incorporations but the value of the goodwill no longer qualifies for ER.

The company will also be denied tax relief on the value of goodwill.

While other CGT reliefs remain available to reduce or defer any capital gains arising on incorporation these serve to rollover the gain into the value of shares in the new company and do not provide for cash to be made available to the seller. As such the removal of this useful relief will come as a blow to many sole traders and partnerships considering transferring their business into a company.

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If you would like to arrange a meeting to discuss this matter, or would simple like more information, please get in touch with Julie McMahon Tax Project Manager. Direct Tel: 0141 643 9204. Email: jmcmahon@adplus.co.uk

NOTES:

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

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