If you have a business and trade as either a sole trader or a partnership, an option you may have is to trade as a limited company – i.e. incorporate your business. There are a number of factors which affect the decision, and it’s a subject we’ve looked at before (see here).
When a business is incorporated, it is also possible to sell the assets to the new limited company, which typically includes stock, fixed assets and goodwill. This last asset class, goodwill, provided a tax planning opportunity.
Firstly, the sale of the goodwill would be subject to Capital Gains Tax (CGT). However, provided that the owner had worked in the business for 12 months, it was possible to claim Entrepreneur’s Relief (ER). This is 10% of the value of the goodwill, after deducting the CGT annual exemption, currently £11,000.
Secondly, the company would write off the goodwill over its expected useful life (known as amortisation), and would receive tax relief on the annual goodwill written off.
The company doesn’t pay the seller for the assets it has just acquired, as it doesn’t have any money, so leaves the balance owed in a director’s loan account within the company, which is available to draw against at any time with no tax due.
The 2014 Autumn Statement has effectively restricted this. In respect of business disposals made on or after 3 December 2014, ER is not available for the sale of goodwill to a limited company, so normal CGT rules apply. ER will still be available on the sale of other assets on incorporation, just not goodwill. See here for details.
Also, the company will not receive tax relief on the amortisation of goodwill. Again, see here for details.
However, there are still a few good reasons to incorporate a business. If you wish to discuss further, please feel free to contact us.