Incorporation and goodwill relief

Incorporation and goodwill relief

Wed 16 Mar 2016

Entrepreneurs’ Relief on goodwill transferred to a limited company was withdrawn on 3 December 2014.  It’s back – but only where the resulting shareholding is less than 5%.

A well used planning technique to effect a 10% tax rate on business profits was blocked in December 2014.  It worked like this – a sole trader (it worked with partnerships too) transferred his business to a limited company at market value – including goodwill.  This gave rise to a 10% tax charge with the availability of Entrepreneurs’ Relief (ER).  Consideration was left outstanding on loan account which was paid down tax free, using the company’s future profits.  And the company’s amortisation of the goodwill could also be tax deductible meaning the company’s profits were tax free as well.

The anti avoidance legislation in December 2014 removed ER on incorporations (and the tax deduction for amortised goodwill).  However, genuine sales of businesses to unrelated companies were also caught.  Today’s announcement reinstates ER on a disposal of goodwill to a company in which the vendor then holds less than 5%, and it is backdated to December 2014.

Another ‘unintended consequence’ rectified.  Seem to be a few of these around.

Author: Graham Odlin

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