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January 12, 2015

Tax Benefits of Incorporating a Business Reduced

The Autumn Statement in December 2014 included a surprise amendment to the rules affecting how goodwill is treated on the incorporation of a trading business.

It is important to note that the change reduces the potential tax benefits of the actual incorporation procedure itself; however the annual benefits of operating as a limited company (as opposed to say a partnership) still exist in general.

The Change

Any sole traders or partnerships incorporating their business from 3 December 2014 will not be able to claim Entrepreneurs' Relief on a sale of goodwill to their new company.  Also from this date, the new company will not be able to amortise the goodwill against profits for corporation tax purposes.

So, in essence, the tax benefits of selling goodwill to the company for cash are now much reduced and most people will exchange their business goodwill for shares in the new company.

Going Forwards

If an individual has capital losses available then they could still consider selling the goodwill for cash because the gain (otherwise taxable at 28%) on selling goodwill can be relieved by the losses.  Such a sale will create a loan owed by the company to the individual which can be drawn down tax free at a later date.

Similarly, goodwill could be sold up to the value of the annual capital gains exemption (if unused otherwise) to generate a tax free loan.

It is of interest to note that the change in rules will not impact the tax treatment of goodwill that was sold for cash prior to 3 December 2014.  Any goodwill that is unamortised at that date can still be set off against profits for tax purposes in the future.

Also, the change in rules does not affect the treatment of goodwill that is sold for cash between unconnected parties.

Contact us today to discuss your tax requirements.
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