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Corporation Tax relief on Goodwill write off

My Client owns 21% of an LLP. He is selling part of this holding to a Limited Company (which he has 100% control over), so the transaction is 'not at arms length'.

The Partnership share comes with rights to a guarenteed monthly drawing of £7,000 and the asset is valued at £200,000.

My Client is of the opinion, that he can write down the value of the intangible investment over 25 years, or even less. He has had advice from a financial advisor suggesting that the income received from the monthly drawing can be offset against the write down cost of the investment , thus no CT.

I have told him this advice is incorrect, as Intangible Asset w/downs are not allowable under CA relief. He has suggested that under CTA2009 (S728 onwards) there is the provision for obtaining tax relief on such write downs.

I have suggested that at best this relief would offer 4% per annum relief and this could not be justified as transaction not at arms length and there is no finite end to the monthly fee payment so there is little arguement to devalue the asset.

Even if all this wasn't relavent, the relief (at 4%) would only equate to £8k which would not put a dent in the £84,000 minimum income a year from the investment.

Unfortunately this is one of those Client's who reads a bit of information regarding Tax legislation, finds a bit that justifies his actions then will not budge from this position. If I am missing something I would appreciate a steer.



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By cfield
18th Jun 2012 22:34

Depends on when goodwill was created

Under the intangibles regime, amortisation is deductible against corporation tax if the asset (ie the goodwill) was created no earlier than April 2002. The fact that the company is controlled by the vendor makes no difference.

The only rule I'm aware of on the amortisation period is that it cannot be more than 20 years unless you can prove that the useful life is longer. No reason why you should not amortise over a much shorter period and claim a full tax deduction each year.

The company would have to pay corporation tax on any future disposal of the partnership share at market value less original cost, so the taxman may get his money back many years down the road.

Your client would be well advised to sell ALL the partnership share to the company if he wants to claim Entrepreneurs Relief, as part disposals of an asset do not usually qualify (unless it is also the part disposal of the business as held by the decision in the United Foods case last year).

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A few things spring to mind

Firstly, the related party rules don't apply unless the intangible asset in question existed (or was deemed to exist) before 1 April 2002. I think you'll find the asset we're looking at here can only be considered to exist currently.

Secondly, it's not goodwill - the partnership goodwill remains in the partnership - it's a right to income, and as such, I think you'll find that it's a financial asset, as defined in FRS 25/IAS 32.

That puts it within the exclusions to the intangibles regime (S. 806 CTA 2009).

Thirdly, there does seem to be a disposal of part of a business (a partnership share), so that doesn't seem to disqualify Entrepreneurs' Relief.

What precludes the ER claim though, it seems to me, is Chapter 5A ITA 2007 (see in particular S.809AZF).

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