Self employed to Ltd... goodwill benefits post 2014?

[Dinky]

Hello

I incorporated last year from being self employed to limited company. My accountant took care of setting the company up, but I've only just learnt of 'goodwill' and how this could have been transferred. Have I missed a trick by not transferring goodwill?

I've done some reading and can't get my head around if I've missed out on any benefits by not transferring goodwill, so I hope someone can enlighten me. I can tell you want I've learnt, and then hopefully someone can tell where I've gone wrong and set me straight.

I understand that the value of goodwill is subjective, and that's for another post. I understand that since 2014/2015 when the policy changed goodwill no longer benefited from tax relief, however, there would still be a benefit from tax relief once company is sold. Is this correct? If so, it would have still be beneficial to transfer goodwill as I would benefit from being able to off set the cost of goodwill against corporation tax once the business was sold. Have I got this correct, or am I horribly wrong? I hope it's the latter as would mean I haven't missed out.

Thank you

 

[Clinton]

If so, it would have still be beneficial to transfer goodwill as I would benefit from being able to off set the cost of goodwill against corporation tax once the business was sold. Have I got this correct, or am I horribly wrong?

You seem to misunderstand a few things about tax (and goodwill and more).

If you have £100K of goodwill on your balance sheet when you sell the company for £500K, your capital gain, as the 100% shareholder, is £400K and you'll pay CGT on that £400K (though you'll probably qualify for Entrepreneurs Relief and pay only a flat rate of 10%).

If you have no goodwill on the books when you sell for £500K, your capital gain is £500K.

So the difference in tax at the point of selling is 10% of £100K or £10,000.

Corporation tax has nothing to do with anything. CT is what you pay on the profit the business makes every year. It's irrelevant to the calculation of CGT or anything else.

But with all these matters you do need to have a good accountant. Even that ER I mentioned earlier - when the time comes you may not get ER and you may have to pay normal CGT ...unless you've done a few things the right way to meet the qualifying requirements.

Oh, and BTW, if you raised goodwill at the point of transferring assets to the company, the value of that goodwill would have been added to your personal income for that year and you would have been liable to pay tax on it!

Nothing with tax is simple. Even when it looks simple there are hidden dangers that deserve the advice of a good accountant.

 

[UK Contractor Accountant]

What's your business?

 

[Adam93]

Firstly, you need to establish what you are selling. Is the company selling its trade and assets (inc goodwill) or as a shareholder, are you selling the shares. The answer to your question will differ greatly depending on what is happening.

If the company is selling its trade and assets, it will pay corporation tax on any of the gains (gains being sale proceeds less cost) - if the goodwill wasn't correctly transferred to the company, you would've lost out.

If you are selling the shares of the company, you may have lost out a little, but not as much as if the company is selling the trade and assets.

For for amortisation of the goodwill being deductible for the company, this will depend on when you started trading (Pre-April 2002) and whether you incorporated before or after 3rd December 2014.

There is too much to consider on an internet forum, you need professional advice. How the company was incorporated will also be important (s.162 incorporation relief or s.165 gift relief routes etc).

 

[Dinky]

@Clinton - Thanks for your explanation and examples, helped a lot.

My accounts have yet to be submitted for my first year. Is it not possible to add goodwill to the books now, or is this only possible at time of incorporation? If it were added as all shares, I assume more shares would have had to been added, or value of those shares increase, is this correct? Company was setup which I believe is standard way, 100@£1 each.

when the time comes you may not get ER and you may have to pay normal CGT ...unless you've done a few things the right way to meet the qualifying requirements.

What would those few things be please?

What's your business?

Online retail

Firstly, you need to establish what you are selling. Is the company selling its trade and assets (inc goodwill) or as a shareholder, are you selling the shares. The answer to your question will differ greatly depending on what is happening.

I'm not selling anything as yet, however, I'm just trying to ascertain if I will lose out by not transferring goodwill, which appears I would when I come to sell the company. As for how the company was incorporated, my accountant set it up and transfer of assets/goodwill wasn't discussed so there is no incorporation relief/gift relief etc. I was completely unware that I could have transferred assets and goodwill until I just came across it myself recently.

 

[Clinton]

What would those few things be please?[/USER]

Any good accountant will tell you. It's things like having a controlling interest, having held the shares for a certain time etc. Then there were some more recent changes involving restrictions on ER for holders of certain types of alphabet shares. And all that applies to sale of shares rather than sale of assets, and ER is also subject to a single lifetime limit.

Did I mention you need to speak with a good accountant? Or join the other genuises.

 

[Dinky]

Haha, I hope not to join the other 'geniuses'. I fully appreciated professional advice which is why I hired an accountant as mentioned to set up my limited company, and I still have that accountant.

Before hiring an accountant I considered many and this firm came with many positive reviews. When I joined I specially asked "please can you advise best way to structure everything to maximize tax efficiency". I don't know what I don't know and I was unaware that it was possible to transfer goodwill/assets which is why I hired an accountant and asked the question. My accountant did not mention, advise or explain that it is possible to transfer assets and goodwill.

Can anyone advise please, as my accounts have yet to be submitted for my first year is it still possible to add goodwill to the books now, or is this only possible at time of incorporation?

 

[KAC]

Online retail

I'm not selling anything as yet, however,

If you are not selling anything yet, why do you believe that there is a value for goodwill?

 

[Dinky]

Not selling anything as yet. If I sell in the future, then goodwill will be of value as kindly illustrated by Clinton above.

 

[gpietersz]

My accountant did not mention, advise or explain that it is possible to transfer assets and goodwill.

Either your accountant thinks it was not possible or not beneficial in your circumstances, or your accountant missed something. I suggest you ask your accountant first. Someone who knows your business, and looked at it at the time of incorporation will have the facts necessary to answer the question properly.

There are people here (and elsewhere) who can give you advice, but if you want the same level of advice from them as your accountant can give you, you will have to pay and brief them - i.e. get a second opinion from another accountant.

I would bet on the former of the above. Either you could not justify a significant value for goodwill or as @Clinton pointed out you would have to pay tax on the extra "profit", or something similar.

 

[Dinky]

Yeah I'm going to speak to accountant, but nothing about my business was discussed before accountant firm incorporated on my behalf, so it's definitively not that they didn't think it was not possible/not beneficial as absolutely no details about my business was discussed before incorporation other than turnover to determine the fees I pay. Before incorporation I did state that I was transferring from sole trader to limited company and ask specifically for the best way to structure everything to maximize tax efficiency.

Still curious to know the following if any one can answer please. As my accounts have yet to be submitted for my first year, is it still possible to add goodwill to the books now, or is this only possible at time of incorporation?

 

[UK Contractor Accountant]

You need to establish first whether your business has any goodwill value to transfer?

Could you sell the business for more than the value of its assets?

 

[Clinton]

@UK Contractor Accountant , when transferring an online business from sole-prop to Ltd, there'd likely be assets such as domain name, website (and dev work done on the site), software created or modified, subscriber lists, other digital assets.

Even a mature Google Ads campaign has value as there's statistical data there with cost benefits for future marketing campaigns.

The price at which those assets are transferred to the Ltd is a matter the OP needs to discuss with a good accountant as it's not simply a case of picking a number out of thin air.

There are advantages to raising goodwill. For one, it'll result in the owner/director's account being in credit which allows for the OP to withdraw some future profits without paying dividend tax.

However, as I pointed out earlier, the figure at which he transfers these assets is a capital gain for him, in his personal name, in the year of the transfer and is therefore liable to tax.

It might be beneficial for him if the valuation of those assets turns out to be a sum that coincides with what his CGT allowance for the year happens to be.

OP, just to be clear, my message above is not a substitute for professional advice. Go back to your accountant, or go pay money to get a second opinion as @gpietersz suggests (though I will admit that very few accountants are savvy in this area. Besides, all accountants work for HMRC, we're just the mugs who pay their salaries. So don't rely completely on them to give you great ideas on how to save tax! )

 

[UK Contractor Accountant]

when transferring an online business from sole-prop to Ltd, there'd likely be assets such as domain name, website (and dev work done on the site), software created or modified, subscriber lists, other digital assets.

I would regard those as plant & machinery not intangible assets such as goodwill?

Well the website is likely to have online ordering & payment system with back end software running it all so likely to be regarded as plant.

I have done a few of these valuations when transferring to a limited company but that was when there was tax relief available on the goodwill transferred . Each case was challenged by HMRC but they never ended up changing the valuation.

 

[gpietersz]

@UK Contractor Accountant can the value include existing customers and contacts?

 

[UK Contractor Accountant]

@UK Contractor Accountant can the value include existing customers and contacts?

only at the date of transfer.