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9 December 2014
Rather surprisingly, the Chancellor announced that Entrepreneurs’ relief will no longer be available on the transfer of the “goodwill” of a business to a close company if the proprietor of that business is a ‘related party’. For example, where a sole trader transfers his business to a new Company (aka incorporation).
It should be stressed that this change only applies to goodwill and not all intangible assets. Therefore other Intellectual Property rights should not be affected by these new provisions.
The rules apply to consideration received in the form of cash or debt for disposals on or after the 3rd December 2014. It will also apply where the consideration is the issue of new shares where ‘incorporation relief’ (which applies automatically) was waived by the transferor by election.
Furthermore, the close company will no longer gain relief for the acquisition of the goodwill on the transfer.
Clearly, these rules have been introduced to remove a perceived advantage allowing the proprietor of a business to extract funds on such sales at the 10% CGT rate whilst obtaining a corporation tax deduction rather than suffering normal rates of income tax and NIC on business profits.
We think the Government has got this one wrong. Clearly, goodwill is as much an asset of the business as, say, a commercial property.
Why, therefore, should it not qualify for relief? It is accepted that goodwill might be more difficult to value than a dirty great commercial property. However, that in itself is not a reason for bringing in a set of rules which discriminate against businesses which create proportionately high levels of goodwill. This will of course distort the type of entities through which a business will operate.
The rules have their own basic tax avoidance provisions, although these seem quite limited at the moment. One can certainly contemplate a number of transactions that would get a business operator to a similar position under the new rules.
It has no impact on other capital gains tax reliefs available on incorporation.