For unincorporated businesses, one of the more important elements of the Chancellor's statement of 3 December 2014 was the decision to abolish, with immediate effect, entrepreneur's relief for transfers of goodwill to companies owned by the transferor. Previously, such a transfer was treated as a disposal of a capital asset (goodwill) which qualified for entrepreneur's relief.
In practice, this meant that the Capital Gains Tax payable was limited to a maximum of 10% of the value of the goodwill transferred. The value of the goodwill in the company's balance sheet was normally matched by a debt due to the business owner which could then be paid without tax consequences.
The rather obvious tax planning opportunity was widely used, and often abused: hence the decision to change the law. Transfers of goodwill into a company will now carry a potential tax charge of 18% or 28%.The company acquiring the goodwill will also not be able to claim a Corporation Tax deduction for the writing down of the goodwill value.
A transfer into a company can still be made tax free by claiming hold-over relief, but this will lead to a higher tax charge in the company if the goodwill is subsequently realised at a profit. If you are considering setting up a business or transferring an existing business into a limited company, the Company and Commercial team at Barrett & Co can advise you on the pros and cons of different business structures.
Contact Martin Reynolds at: firstname.lastname@example.org