Sale of business and stock

leonag

Hi

I have a client who has sold her small business for £5000, £2275 of this was valued as stock, the rest goodwill. I'm having an unsure moment, I understand all the capital allowances for the final year and that the goodwill will come under capital gains, but would the stock be valued as a sale and so come under trading income? The only other business I've done cessation of trading for was a partnership who provided services and so didn't carry stock.

Any help would be appreciated.

Leona

PGM

The sale of stock shouldn't be classed as trading income, because its not trade. Trade is classed as the on-going activity, whereas here its a final sale of everything. And it would be hard to differentiate between what is good will and what is profit on stock.

Monsoon

So is the capital gain 5000 minus the closing stock value from the trading accounts?

I don't actually know the answer.

stefanboro

Monsoon wrote: »

I don't actually know the answer.

haha I love how surprised you sound with yourself

PGM

Monsoon wrote: »

So is the capital gain 5000 minus the closing stock value from the trading accounts?

I don't actually know the answer.

It should be £5,000 (less any selling expenses), less what the owner has invested in the business.

It doesn't matter what the closing stock is, because there could be a creditor outstanding for all or part of this.

deanshepherd

PGM wrote: »

The sale of stock shouldn't be classed as trading income, because its not trade.

Sale of stock is sale of stock. It does not matter who it was sold to. This will be trading income.

PGM wrote: »

Trade is classed as the on-going activity, whereas here its a final sale of everything.

Stock was bought for resale and it was sold. Trading income.

PGM wrote: »

And it would be hard to differentiate between what is good will and what is profit on stock.

Not really. If it is clearly written in the agreement that stock is being bought for £2,275 then that is exactly what was paid. There would be no carrying value of stock in the final accounts as it has all been sold.

groundy

Completely agree with Dean.

However at that value of sale, you should have advised sale to be all goodwill and therefore tax free depending on any other CG's in year.

PGM

deanshepherd wrote: »

Sale of stock is sale of stock. It does not matter who it was sold to. This will be trading income.

One of the badges of trade is a profit seeking motive. I'm assuming (maybe wrongly?), the stock was sold on at cost as part of the business. So I don't see how this is classed as trading. Although if its sold as cost, there'd be no profit so it would matter anyway.

deanshepherd

The business is already trading and profit motive has been established.

When a sale of a business takes place each item being sold is treated separately according to the tax applicable.

Stock goes to P&L as income.
Assets go to capital allowances comp as disposal proceeds.
Goodwill goes to CGT comp.

I'd be surprised if the stock matched cost. Usually you would get a stock valuer to come in and provide an independent valuation but with such a small business a reasonable amount agreed between the two parties is probably more likely.

PGM

deanshepherd wrote: »

The business is already trading and profit motive has been established.

When a sale of a business takes place each item being sold is treated separately according to the tax applicable.

Stock goes to P&L as income.
Assets go to capital allowances comp as disposal proceeds.
Goodwill goes to CGT comp.

I'd be surprised if the stock matched cost. Usually you would get a stock valuer to come in and provide an independent valuation but with such a small business a reasonable amount agreed between the two parties is probably more likely.

Thanks for the detailed reply and setting me straight on that!

leonag

Thank you for your replies everyone, they've been very helpful. Nice to know what I was intending to do was right, but it's always good to get a little reassurance.

Leona