Incorporation and goodwill
When a business is incorporated the business owner sells all, or most, of the business assets to a company. This may include goodwill (i.e. reputation, customer relationships, value of continuing contracts), but valuing the goodwill of a small business is very tricky.
In the past the value of goodwill has sometimes been set on the high side to maximise the gain that arises in the hands of the business owner on the sale of the assets. The business owner then claims entrepreneurs’ relief, which if all the conditions are stratified, results in a tax bill of only 10% of the net gain after deducting the £11,000 annual exemption.
The Government has now put a stop to this little game. For business disposals made on and after 3 December 2014, entrepreneurs’ relief can’t apply to a gain that arises on the transfer of goodwill to a company that is related to the seller.
Entrepreneurs’ relief will continue to be available on the transfer of other assets on incorporation – just not on the gain relating to goodwill.
If you want to incorporate your business there are a number of tax reliefs that can be used to reduce or defer the gains that will arise. Our tax experts can help you decide which tax relief is best for you to use.