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Two very significant changes were announced in the Autumn Statement that come into force immediately and impact upon the tax efficiency of incorporation. These measures are likely to significantly reduce the tax benefits associated with goodwill.

These need to be borne in mind when discussing incorporation and if there are any currently underway, they should be revisited.

Denying Entrepreneurs’ Relief

First, where business assets are transferred to a related company, entrepreneurs’ relief will not be available on the capital gain. This means that there is no longer the option of realising the value of goodwill and creating a loan balance to draw down on which tax has been paid at just 10%. This increases the tax payable on such a sale to the main rate of 28% (or possibly 18% to a limited degree).

Previously, this was a very tax efficient way to withdraw cash from the company, which, if drawn as salary or dividends, would have been subject to income tax. This now makes the sale a less attractive proposition.

Withdrawal of corporation tax relief on the amortisation of goodwill

Second, the acquiring company will no longer be able to obtain tax relief on the amortisation of that goodwill (unless it was previously acquired by the seller from an unconnected third party), when previously it could have if the business had commenced after April 2002.

HMRC: Capital Gains Tax: denying Entrepreneurs’ Relief for disposals of goodwill to related companies

Implications

These measures are likely to significantly reduce the tax benefits associated with goodwill. They will remove most of the initial tax advantage of incorporation and mean that alternative methods of incorporation are likely be more tax efficient.

However, annual tax saving opportunities are still obtainable via different routes.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.

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