Should I incorporate my business? What you need to know

Where a sole trader, partnership or LLP has established a significant value for the goodwill of their business, it was possible up until 3 December 2014 to transfer that goodwill to a limited company and pay just 10% capital gains tax (CGT) by claiming entrepreneurs’ relief.

The former owner(s) could then draw down on the loan account created with the transferee company over time as future cash was generated by the business. This tax planning strategy became less attractive when entrepreneurs’ relief was denied where the transferor and transferee were related parties, although the latest Finance Act has relaxed this rule where the former owner receives less than 5% of the acquiring company’s shares.

Now that the top rate of CGT has been reduced to 20% from 6 April 2016 for such transfers, rather than 28%, it may be worth reconsidering this strategy.

For example where an individual’s share of goodwill is worth £500,000 the CGT due would be £100,000 leaving £400,000 net of tax. Note that for a transfer in July 2016 the CGT would not be due until 31 January 2018.

You could also consider charging interest to the company on the loan account balance as that may be more tax efficient than dividends for higher rate taxpayers.

Note that although the goodwill will generally need to be written off against the company’s profits, there is no longer a tax deduction for the amortisation resulting in higher taxable profits.

If you are in doubt, curious or ready to take action, don’t hesitate to contact us. Our team of experienced accountants and tax specialists help business people with this every week.

You can contact Angie Harvey on 0131 317 7377 or email angie.harvey@jsca.co.uk and she will ensure you are connected with the most relevant and available member of the team.