Incorporation/goodwill - again

Hi all I know this has come up many times but as it's important to my client I would like to clarify and appreciate anyone's experience.

I'm looking at claiming incorporation relief and contemplating the double entry. DR assets etc credit share premium (?) as the shares issued are just 3 (2 husband 1 for wife). My understanding is that as any gain is effectively deferred until the shares are sold externally then recognizing everything at market value is not compulsory in the new company.

However I was thinking about recognizing the goodwill at below MV say £10k to take advantage of the CGT annual allowance so my double entry would consist of DR assets/goodwill CR share premium and DLA. This would mean in my head that £10k of the gain is being realized now and the rest is being deferred via incorporation relief.

Or can I still recognize goodwill and CR the share premium leaving the DLA account alone on the basis that the goodwill is an asset of the business and incorporation relief automatically applies so there is nothing to report the on persons tax return? He wouldn't of received any cash as it has all gone to share premium and not DLA? I've read in some posts that if you are recognizing goodwill at all then this should be reflected in the persons tax return but my reading of the incorporation relief rules led me to believe this is not the case.

Are there any issues with creating a minimal amount of goodwill to take advantage of the CGT AA as the rules seems to be more focused on people inflating goodwill to claim additional relief by w/o the goodwill (if created after Mar 2002) rather than under inflating.

The incorporation relief rules say that the consideration the sole trader receives when incorporating can be wholly or partly in shares.

In the same example above if I don't recognize the goodwill at all should it be DR assets etc CR share premium. If I CR DLA surely he is effectively receiving cash?

However I am also not 100% as all the practices I have worked in have simply DR assets etc CR DLA! I have some GT experience, lots of exam experience via ACCA and ATT but like most people this is not something I deal with day to day...

Also I assume if I can recognize goodwill to create £10k gain to realize now this is fairly straight forward to record on the persons tax return.

Note that I actually think that the goodwill could really be worth £50k plus even being conservative as although the business is a one man band he has established a fantastic brand that is free goodwill in nature (if including the personal goodwill it is probably an even higher figure).

The business has been trading for 20 years but the brand and in our opinion the free goodwill has been created post Mar 2002.

But for various reasons I don't want to go down the route of recognizing the goodwill in full so please entertain my first part to the post (although other thoughts are always welcome). If I go the full MV route I would perhaps use HMRC's valuation service but it is the client who doesn't want this hassle and he is more than happy with the standard Ltd tax/NI savings he will make.

Some thoughts would be much appreciated! There is a lot to digest but hopefully some of you can make heads and tails out of it...



  • stevo5678
    stevo5678 Registered Posts: 325
    If I go the way most seem to go by bringing the assets into the Co etc and also DR Goodwill with the full value say £50,000 and declare it on his personal tax return (and claim ER).

    How does it then work if he sells the company/his shares later on? Say the total assets is worth £50,000 and so is the gain and he pays the tax on this when selling to the LTD Co when incorporating. Say 10 years later the business is still worth £50k and he sells his shares, does he pay tax again?? Logic tells me obviously not and that the base cost of the shares should be the £50k so there is no gain (he effectively paid for it on incorporation) but in reality how is the base cost anything but the nominal value. He hasn't paid anything for his share (apart from nominal value) as he already sold the ST business to the Co for cash via his DLA and not share capital? Maybe the fact that the Co claims CA's on the goodwill offsets this effect?

    The other thing is I know you can claim CA's on goodwill created after Mar 2002 but what if the goodwill isn't actually amortizing in reality? If the businesses goodwill is actually growing?

    I've read S162 and s165 in detail and using s162 to best effect seems to be by CR some to DLA and most to share capital/premium.
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