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Q: I currently operate my business as a sole trader but am planning on incorporating. I heard that some changes were announced in the Autumn Statement in respect of the tax treatment of goodwill and wondered how this could affect me?Anna, Roxburghshire
A: In his Autumn Statement on 3rd December 2014, the Chancellor announced that certain restrictions would be applied with immediate effect in respect of the tax reliefs available on goodwill transferred to a company on incorporation.
Internally generated goodwill is often transferred to a company along with the other assets of the trade when a business is incorporated. The nature and valuation of goodwill is a very contentious area.
Where the value of the goodwill transferred by an individual to their company on incorporation exceeds any annual exemption available to them for that tax year, a capital gains tax liability will arise. Previously, the rate of tax applicable to the gain could, if certain conditions were met, qualify for entrepreneur’s relief and be reduced to 10%. For transfers taking place on or after 3rd December 2014, entrepreneur’s relief will not be available in respect of goodwill transferred to a related close company and the tax rate applicable in these circumstances will be 18% where the gain falls within the individual’s basic rate band and 28% thereafter, based on current capital gains tax rates.
For the company, the goodwill transferred is included on the balance sheet and amortised as an expense in the accounts over a period of time. Previously, where the goodwill was generated post 1st April 2002, the company was able to obtain corporation tax relief for the amount of goodwill written off in each period. For goodwill transferred on or after 3rd December 2014, no corporation tax relief will be available where the business is acquired from a related individual until the goodwill is subsequently disposed of by the company.
These changes may have a significant impact on any business seeking to incorporate. Other reliefs may be available but careful consideration will need to be given when structuring the incorporation to ensure tax efficiency.
Rennie Welch LLP accept no liability on the basis of this article and detailed advice, taking into account individual circumstances, should be obtained before entering into any transaction.
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