Goodwill Tax Advantage

[multilingual]

We recently changed over from a partnership to a Ltd company. Beforehand I did a bit of research and came across the option of selling the 'goodwill' of the partnership to the Ltd company.

In effect, we are actually selling the business to the company. But of course we own that company.

The accountant said that they were aware of this option but never thought to mention it. I was a bit annoyed at that because why should I be the one who comes up with these ideas? Isn't it his job to make me aware of them?

Anyway, we went ahead with it and it looks like we could be getting a sizeable amount back as a (virtually) tax free sum. This goodwill has to come out of future company profits, but it is certainly worth it.

Just wondered if anyone else had looked into this?

JB

[Alpha]

In short most good accountants are aware of this and many other aspects of starting companies, transferring to a limited company and closing them down.

The accountant said that they were aware of this option but never thought to mention it. I was a bit annoyed at that because why should I be the one who comes up with these ideas? Isn't it his job to make me aware of them?

Yes it is and I would suggest that you change accountants.

When I discuss with clients the possibility of changing over to a limited company I go through all aspects with them, additional paperwork, costs...especially accountancy, tax savings(with a warning that it may not always be tax advantageous) and the impact of s. 165 against s162 changeover.

The creation of goodwill is not always possible, it all depends on whether you are transferring all assets to Limited company(excluding cash) or not.

[multilingual]

I am considering changing because I don't feel as though I can relax with him.

I am thinking that if he didn't mention the goodwill option then what else does he miss?

I want to get on with my job knowing that someone else is taking care of all these matters.

Isn't that how it is supposed to work?

JB

[Alpha]

Isn't that how it is supposed to work?

Yep :D

Whilst we cannot always pick up everything especially when clients do not tell us the situation you described is given on a plate.

[Alpha]

Oh and I hope he got the procedures right otherwise that goodwill is going to disappear :cry:

[multilingual]

Thanks for cheering me up

:(

[james constant FCCA]

Hi

I read your question and I thought of adding a couple of critical points from experience. Although this may not apply to you, you should bear in mind that personal companies (ie small or one man bands) usually do not have any goodwill as goodwill is personal to the business owner rather than belonging to the business itself. That is the taxman's stated position who has launcehd an offensive on the strategy and treat any overvaluation of goodwill as taxable income of the business owner unless repaid to the company (it actually gets more technical than this but let's keep matters simple here).

On the other hand, for established businesses in particular locations eg retails shops, restaurants etc the goodwill (assuming any) could be sold to the company along with the rest of the aqssets without the complications descrobed above, bringing a major boost to the directors' account.

So, yes, this is a highly technical subject and you sshouldnt look at it lightly.

[multilingual]

you should bear in mind that personal companies (ie small or one man bands) usually do not have any goodwill as goodwill is personal to the business owner rather than belonging to the business itself.

Excuse me for my lack of knowledge, but the above quote seems to be a generalisation.

I can understand the logic if that person was an artist (for example), where there is no business without the person. He/she cannot go Ltd and then leave it to others to run because without the artist there is no product. In this case there cannot be goodwill sold because it will always belong to the individual.

But if it is a case of a company that started out in a singular capacity and the business now runs automatically using websites, autoresponders, automated shipping, etc, so that the owner can sit at his desk and answer the odd phone call, then the goodwill (as I see it) has to belong to the business because if he walks away he has nothing.

Does that make any sense?

:)

JB

[parm]

Just like to clear one point, assuming goodwill is chargeable to the company any money received by the individual should be disclosed in his/her self assessment and obviously treated for income tax. Correct?

[multilingual]

I hope not otherwise there doesn't seem to be much point in doing it and the tax man wouldn't be against it.

The idea is to get the goodwill as a (virtually) tax free lump which comes from the profits of the Ltd company to be repaid to the individual that the goodwill belonged to.


JB

[parm]

That was the precise point I was picking up on “Tax Fee”. Perhaps Alan can clarify this ?

[parm]

That was the precise point I was picking up on “Tax Fee”. Perhaps Alan can clarify this ?

sorry meant "TAX FREE"

[Alpha]

I can only generalise here as James said the considerations are complicated and each case has to be taken on it's own merits.

The general intention is that the sale of goodwill will create a capital gain.

That gain attracts taper relief on business assets of 75%.

this is then charged as a capital gain however the individual has an allowance of 8500 in 2005-6 so in extremely simple terms if the goodwill is £34k

chargeable to Capital Gains tax after business asset taper relief of 75% £8500 therefore no tax to pay.

Please note that this is a very simple example.

The goodwill valuation would need to be agreed with the revenue and would require a professional valuation .

etc etc.

Disclaimer the above cannot be taken as advise for any particular circumstance and cannot be relied upon.
People should seek specific advise from a professional.