Valuation of non personal goodwill

MarieNoelleMarieNoelle Trusted RegularHampshire/Surrey borderPosts: 1,094Moderator, MAAT, AAT Licensed Accountant
Hi all,
I have a sole trader, a well established interior designer, who incorporated in 2016/17. I believe most of the goodwill is personal but in the last couple of years she has used subcontractors who work under her brand name (generating over 10% of her profits). This make me think there is an element of non personal goodwill but I am struggling to find an "approved" method that would satisfy HMRC. The amount of goodwill is likely to be under the annual CGT allowance so I was going the CG34 route rather than a professional valuation.
I would welcome any pointers.
Thanks

Comments

  • readerreader Experienced Mentor Posts: 678MAAT, AAT Licensed Accountant
    The are many different ways to value a business, e.g. net assets on balance sheet, 1.5 x turnover, 3 - 5 x profit, etc.

    Why are you valuing? To create a CR in the DLA?

    If the value is greater than AE will you claim ER?

    I believe the amortization of the GW is not allowable for CT.
    MarieNoelle
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderPosts: 1,094Moderator, MAAT, AAT Licensed Accountant
    Many thanks for your answer @reader
    I believe that if goodwill exists it has to be recognised. Yes ultimately if it creates a credit balance on the d'loan it is a bonus.
    No ER available but I expect the value will be under the AE.
    My problem is that goodwill inherent to the owner is not normally recognisable. But in this situation i think there is scope to introduce some goodwill, I am just not sure how to measure it. I was working on the basis of say 10% of average superprofits for last 3 years, which would give a value between 5 and 10k.
    I know that at the end of the day it is highly subjective but I would like to present it in the best way on CG34.
    Thanks again.
  • Bmer82Bmer82 PlymouthPosts: 56FMAAT
    why not calculate goodwill in a normal profit valuation method and use the % of externally generated profit to establish the non personal goodwill? get it approved by HMRC ahead of time and bobs your uncle?
    MarieNoelle
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderPosts: 1,094Moderator, MAAT, AAT Licensed Accountant
    Thanks @Bmer82 this is also my reasoning.
  • readerreader Experienced Mentor Posts: 678MAAT, AAT Licensed Accountant

    Many thanks for your answer @reader
    I believe that if goodwill exists it has to be recognised. Yes ultimately if it creates a credit balance on the d'loan it is a bonus.
    No ER available but I expect the value will be under the AE.
    My problem is that goodwill inherent to the owner is not normally recognisable. But in this situation i think there is scope to introduce some goodwill, I am just not sure how to measure it. I was working on the basis of say 10% of average superprofits for last 3 years, which would give a value between 5 and 10k.
    I know that at the end of the day it is highly subjective but I would like to present it in the best way on CG34.
    Thanks again.

    Just out of interest, if the GW was greater than AE, why won't ER be available?

    if not ER and above AE, how would you tax the GW? CGT 10%/20%?
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderPosts: 1,094Moderator, MAAT, AAT Licensed Accountant
    Hi @reader
    ER is no longer available for transfer of goodwill on incorporation (TCGA 92 s169LA)
    She is a HR tax payer so the rate of CGT would be 20%.
    She doesn't qualify for incorporation relief as she is not transferring all her assets. I guess depending on the value agreed a claim for gift relief may be in point.
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