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Selling a business after incorporation

The benefits of incorporating a sole trader or partnership business are well known; eg goodwill, amortisation, entrepreneurs relief, loan accounts, etc. However, what happens if the business is then sold to a third party a couple of years down the line for a price similar to the value agreed with HMRC on incorporation?

If the owners sell the shares then obviously the base cost would be the value at which they were subscribed (usually £1 each) and they would claim ER on the whole proceeds effectively. But if the third party purchased the underlying business from the company rather than the shares, obviously the company would have a chargeable gain.

Could the company claim the value agreed with HMRC on incorporation as its base cost and only pay tax on the increase in value since then, or would it have to pay tax on the disposal proceeds?

Common sense says that the base value must be the amount "paid" by the company otherwise most of the gain would be taxed twice, once on the original owners and then on the company. But what happens if the company has claimed amortisation of the goodwill element againmst its trading profits? It seems to me that the goodwill would then be claimed twice, first against trading profits and then against the sale proceeds.

Am I right in thinking that you can only claim the unamortised goodwill in the chargeable gain calculation or is it more complicated than that?

Chris

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17th Mar 2015 15:36

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By blok
13th Oct 2011 09:18

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Assume the company paid £100 for the goodwill (DR gooodwill, CR loan account).  And then the company sells for £100 in two years time there will be no gain.  The gain will have been recognised by the original seller.

or,

If the company acquired goodwill for the issue of shares, the company has not paid anything for that goodwill, so upon sale for £100 there will be a gain of £100.  The gain will be in the company.

This assumes that the goodwill is old style goodwill, pre 02.

If it is post March 02 goodwill then you need to compare the receipt from the sale against the unammortised amount (for tax purposes).  Any gain will be charged to trading profit.  No uplift for Indexation.

Is that what you mean?

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By cfield
29th Oct 2011 00:48

Goodwill on incorporation sold later

Yes that was what I meant, although I overlooked the fact (as reminded above) that goodwill (post April 2002) falls into the intangibles regime and the proceeds are thus taxed as trading profits, not as chargeable gain. Any unamortised goodwill is written off in the year of disposal as a separate transaction, not as a deduction from the sale proceeds. All seems clear now. I just forgot that one vital aspect when I posted the query. My initial analysis would have produced the correct tax figure but in the wrong boxes on the CT600.

Chris

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