During the Chancellor’s recent 2014 Autumn Statement he announced two significant changes to the treatment of goodwill on the incorporation of a business which apply to transfers from 3 December 2014.
Goodwill on Incorporation
The first change was to deny the special 10% Entrepreneurs’ CGT rate applying to gains arising on goodwill transferred where an unincorporated business is ‘sold’ to a close company to which the seller is related. Traditionally under this method no cash changes hands with the consideration left outstanding as a loan to the former proprietor. The loan can then be drawn down by the former proprietor effectively tax free.
As a result of this change any goodwill gains could now be taxable up to a rate of 28% resulting in a significant CGT liability having to be funded, making this method of transfer now unattractive in most cases.
Fortunately there exist two alternative methods of structuring an incorporation which initially avoids any CGT payable on the goodwill and other capital gains:
- Method A ~ This option involves transferring all of the business assets for shares in a new company which then allows all of the capital gains arising on incorporation, including those relating to goodwill, to be deferred until a subsequent disposal of the shares.
- Method B ~ a further option effectively gifts the business to the company, allowing a hold-over election on any gains arising to be made on an asset-by-asset basis.
Note however that under both of these alternatives, cash extracted from the company post-incorporation will be taxable as normal remuneration or dividends.
Following this change it has now become even more important to seek professional advice so that incorporation can be tailored according to the asset values and individual circumstances of the proprietor(s) of a sole trader or partnership business.
Amortisation of Goodwill
The second change applicable from 3 December 2014 results in goodwill written-off in the company not being allowed as a deduction for corporation tax purposes.
Note that this significant change applies irrespective of whether incorporation relief or gift relief described above are claimed or not.
This change effectively aligns the treatment of internally generated goodwill within a company with that of goodwill written off in an unincorporated business, which of course cannot be claimed as a tax-allowable deduction.
Other Aspects of Incorporation
An article dealing with the tax benefits and other aspects of incorporation can be found on our website by clicking on the following link:
If you need advice on a planned or forthcoming incorporation of a sole trader or partnership business then please do not hesitate to email us at: firstname.lastname@example.org or call us on 01633 2155544