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goodwill on incorporation

If a trader decides to incorporate can he claim incorporation relief on any goodwill he sells to the company?  Presumably he would have to get the business valued.

I know you can claim incorporation relief on purchased goodwill, but if the goodwill was not purchased, but generated by the trader, is it possible to have this valued, and claim incorporation relief then leave it on the DLA?

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You can't...

... use incorporation relief and credit the goodwill value.

The whole of the assets of the business (with cash being a permissible exception) have to be transferred to the company in exchange for the issue of shares.  Crediting money to the DLA for the goodwill breaches that condition.

Remember too that if the conditions are met, incorporation relief applies automatically, unless you elect for it not to.

if you're entitled to incorporation relief, there's no need for a valuation, the shares in the acquiring company simply effectively take on the base cost of the chargeable assets in the unincorporated business on any subsequent disposal of those shares.

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When using incorporation relief, i thought goodwill had to be recognised (at true value), with the amount created going to share premium account. If created after April 2002 then amortisation tax deductible, etc, with the obvious tax saving, but low distributable profits figure. Am I not right?

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Or..

you go the other (S165) route and, as you indicate, generate a DLA balance by transferring the  goodwill at value, with your client declaring the gain on his tax return and, possibly, paying CGT @10% on some of it.  

Lots of threads on this subject and you would need a valuation.

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I don't see why you can't recognize some of the goodwill as the consideration needs to be wholly or partly in shares.  Surely the goodwill recognized to provide a credit DLA balance would be the part not in shares?

 

 

http://www.hmrc.gov.uk/helpsheets/hs276.pdf  

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Yes Steve but....

unless you transfer all the assets of the business (except cash), eg debtors, cars, stock, coffee machine etc, incorporation relief (on the shares bit) will not apply, ie you get a CGT liability on the total gain on the goodwill transfer.  Unless it's a fortune therefore, it's usual to transfer just the bits that make sense, say goodwill, stock & equipment, volunteering CGT @ 10% and crediting the total to DLA.

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Calculating goodwill for incorporation relief

The 'true value' of goodwill is often the contentious area. HMRC appear to prefer a goodwill figure assessed by an independent source. On our incorporations we have outsourced the valuation side. Used a firm called RA Valuation Services. It appears to have helped the process go through smoothly.       

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