Incorporation and Capitalisation of Goodwill

In recent years, I have overseen a number of incorporations of sole traders and partnerships into limited companies. The traditional advantages and disadvantages of incorporation are well documented. However, many of my clients have benefited from the protection of limited liability status and flexibility of remuneration via an appropriate mix of salary and dividend to reduce tax and National Insurance costs and increase profits drawn or retained accordingly.

Entrepreneurs' Relief may also be available on incorporation. This relief can be claimed where assets used in a business, including goodwill and business premises, are disposed of in part or whole. For relevant disposals, including disposals of business assets from a sole trader or partnership, Capital Gains Tax is charged at a reduced rate of 10% on lifetime gains up to £10 million. To qualify, an individual must have owned the business, or been a partner in a business for at least one year prior to disposal.

I recently assisted a client in incorporating a well established and successful family business partnership. Based on performance and profitability, Goodwill was professionally assessed at a value in excess of £1 million. The man and wife partners will have 10% Capital Gains Tax to pay on this Goodwill, the remaining 90% will be allocated to Directors' Loan accounts for them to draw against without further tax liability for the next few years.

The Goodwill is capitalised on the Balance Sheet of the limited company, and amortised (similar to depreciation) over a suitable period. The write off of Goodwill arising since April 2002 will usually qualify for Corporation Tax relief.

If you would like to know more about incorporating or selling your business to take advantage of Entrepreneur's Relief and flexibility of remuneration, please contact me.

Peter Morris - Director