My client (ltd company) are selling goodwill only - their purchaser will walk away rather than buy the company's shares. Company has no other assets.
I have always understood that to qualify for Entrepreneurs' Relief the sale would have to be made by an individual (or p/ship); because the goodwill is being sold by the company then the chargeable gain will be subject to Corp tax - no Entrepreneurs' Relief for limited cos.
However HMRC's Helpsheet 275 "Entrepreneurs' Relief" appears to allow a limited company ER on sale of Goodwill (example 1, page 4):
QUOTE (from) http://www.hmrc.gov.uk/helpsheets/hs275.pdf
Example 1
In February 2010 you sell your manufacturing and retail business which you had owned for the last eight years. You make gains and losses on the business assets as follows:
Factory premises £250,000
Goodwill £300,000
Retail shop (£100,000) loss
Shares £100,000
The gains and losses on the factory premises, the goodwill and the shop are aggregated and will together qualify for Entrepreneurs' Relief which will be due in respect of the net gain of £550,000. The gain on the shares is not aggregated with the gains or losses on the other business assets. Entrepreneurs' Relief may be due in rspect of the gain on the shares if the conditions are met for shares to qualify for relief.
UNQUOTE
Do others read into the above example that HMRC are "allowing" ER on goodwill belonging to a limited company? If so, are they allowing it to the shareholder? (because Ltd Cos surely don't qualify for ER). Are we supposed to infer that there is some sort of post-cessation disposal in their example?
Any interpretations welcomed - my client company's directors have seen this HMRC example and I guess must believe I have badly advised them.
Related resources
Replies (9)
Please login or register to join the discussion.
Not the company's assets
My reading of the example is that we are looking at the gains from the point of view of a sole trader who is selling all the assets he/she owns which are the goodwill in the unincorprated business, the factory, the shop and some shares which the sole trader owns.
The shares held by the sole trader may qualify for ER if the conditions are met.
The help sheet states on page one that ER is available to individuals .... but is not available to companies...
So Who Owns The Goodwill?
Hi Lisa, and thank you for your reply.
I'm not reading this the same as you. This is eg #1 of HMRC's alleged helpsheet, so (given that their egs become progressively more complex) it ought to be the least complicated scenario; and I'm unclear as to why they would want to mix and match the vendor's shares in a limited company with goodwill.
Let's simplify HMRC's example by removing the premises from the equation. What you are left with then is the sale of some shares (which must surely belong to the vendor) and an element of goodwill (which presumably belongs to the company). So why/why does the goodwill qualify for ER? We both agree that the (limited) company cannot receive ER; so logic dictates the vendor / shareholder must be entitled to claim that ER (otherwise why would HMRC mention it?). How so? And why?
The alternative scenario is, I suppose, that the goodwill belonged to the vendor all along. But this is eg #1 in a HMRC (alleged) help booklet, which means it ought to be the very simplest of examples. Why oh why would HMRC ccomplicate the issue by bringing shares into the equation? Surely the obvious inference (within HMRC's example #1) must be that if the vendor / shareholder is flogging his/her shares then the goodwill must belong to his/her limited company (in which event how on earth is the company able to claim ER?).
The only possible way I've been able to envisage such a scenario - and it requires both a mental leap and some poetic licence - is if in some shape or form this was a post cessation (of trade) disposal. Otherwise I cannot for the life of me see how or why the vendor might possibly be entitled to ER. The (limited) company sure as hell aren't - we're of a like mind on that :)
Goodwill owned personally?
I admit its confusing the way HMRC are presenting it, but could the goodwill be a personal asset simply used by the company?
EG (1) Goodwill that attachs to freehold premises which have been kept outside the company? I think thats what they call adherent goodwill these days? or
EG (2) On incorporation of a existing business goodwill specifically excluded and retained personally (which is a struture I much prefer and recomend to clients).
Lisa (a different one)
Not companies
I agree with Lisa, the guidance refers to a sole trader disposal who also owns qualifying shares. It is nothing to do with a company, and ER is certainly not available to a company.
2 separate disposals?
(a) Disposal of business
(b) Disposal of shares
ER could apply to either disposal !
There is no difficulty here
The example is taken out of context. If you read the guidance preceding the example, what HMRC are doing is demonstrating the fact that you have to distinguish shares and assets held as investments from other assets used in the business when calculating the qualifying gain on disposal of the business. The OP seems to be misinterpreting the example and assuming that the business is a limited company and that the shares in question are those of that company. They are not - the business is a sole trade and they are shares of some other company, which may or may not qualify for ER dpeending on the circumstances.
(Though I have to admit that it's not really a real-world example - I'm not aware of too many sole traders who hold shares as investments on their balance sheet)
PC
Penny's Dropped
Thank you all, the penny's dropped! Taking it in context it does indeed state on page 2 of the help booklet:
"You can claim relief... on the disposal of the following assets: assets used in the business... but excluding all shares and securities... or any other assets held as investments - see example 1". So example 1 is indeed supposed to illustrate a scenario where shares are held as investments. As everyone has said, it's a sole-tradership sale.
General Rule:
Am I correct then in thinking that in the case of selling a limited company business (essentially its book of customers / goodwill) then unless the owners also sell their shares in the company no ER will be due?
Possible exception to General Rule: somebody mentioned:
2 separate disposals?
(a) Disposal of business
(b) Disposal of shares
ER could apply to either disposal
I imagine you were thinking of a sole tradership sale. In my client's case, the book of customers / goodwill has been built from scratch and is owned by the limited company. The vendor in the disposal is the limited company, so I'm not sure how that might count as a disposal of business by the owner (disposal "a" above).
I'm stumped for ideas - it's the first time I've had an ER case without the actual shares in the company being sold. Selling the company and the goodwill to a third party intermediary wouldn't work, and neither would a post-cessation (of trade) disposal or an associated disposal (the goodwill is owned by the company).
Anyone have any ideas? It does seem rather inequitable that the sale of shares and the business combined qualifies for ER whereas the sale of the business without the shares ostensibly does not. Unless the poster of "2 Separate Disposals" is on the right lines?
Inequitable?
Not really. The two types of disposal are quite different, and you have to understand that companies and individuals have quite different tax regimes. You've just identified the conflict that can arise when someone wants to sell their limited company business. Almost invariably the seller will prefer a sale share - he is the seller, whilst the purchaser will want to buy the assets - the company is the seller.
Thanks Everyone
Thanks Penny,
So a sale of goodwill must involve a sale of shares if it is to qualify for ER.
The trouble is the client keeps delving into HMRC's site trying to come up with workarounds. Thank you everyone for shedding light on HMRC's examples, and Penny for your insight. No matter how the client tries to work this - we're currently hearing cessation of trade followed by a sale and, separately, a sale that would involve selling goodwill to the purchaser and the shares to a third party - you cannot get away from the fact that it is the limited company, not the shareholder, selling the goodwill.
I'm going to have to check out that last one of goodwill and shares being sold to two separate parties - I'm informed that my client's solicitor is of the opinion that the goodwill ought to qualify for ER, which rather has me in cautious mode. Again, there's no getting away from the fact that the goodwill sale would be by the limited company, so Lord knows what he has in mind.
Perhaps the forthcoming budget will shift the sands.