Recognising goodwill on incorporation.

Recognising goodwill on incorporation.

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I am currently going through the process of incorporating a sole trade client.

In NewCo Limited's first year accounts, I have transferred the net book value of the fixed assets as per the balance sheet of the sole trade at cessation.

Q1) Should this value technically be the market value of the fixed assets, which is then used for capital allowance purposes for NewCo Limited, or is using the NBV of the assets in the sole trade, and the written down values for corporation tax okay?   

My understanding is that the director is now the proud owner of one share, (one share in issue), which is valued at the value of these fixed assets.

The sole trade, as a going concern, was making profits of c£100,000 pa.

Q2) Is there a need to recognise goodwill in the Limited Company accounts at this point, or does this only occur if the NewCo was purchasing the sole trade for a monetary value up and above that of the fixed assets value?   

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By MJ Green Accountancy
22nd Jul 2013 10:30

You can introduce the fixed assets in to the limited company at market value or at net book value and written down value.

 

If you're going to introduce them at market value, you must ensure that the disposal is treated correctly in the sole trader accounts and that any tax arising is paid.

 

If you are to transfer the assets at NBV and WDV then you need to make an election under S266 CAA 2001.

 

The share is usually valued at par and the assets are introduced via a director's loan account. You could treat the introduction of the assets as payment for the share and create a share premium account but I don't see any benefit in this.

 

With regards to goodwill, if there is goodwill arising this will be purchased from the sole trader. The sole trader will have to pay capital agains tax on this. If there is likely to be a significant amount of goodwill it is worth writing to HMRC to obtain clearance. They will then find it difficult to dispute this figure in the future. It is simpler to exclude goodwill, however I usually include an amount of £10,000, assuming I can justify it, which falls within the individuals capital gains allowance. Again, this would be credited to the director's loan account, meaning he has funds available to draw on before the company becomes profitable and dividends become available.

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Euan's picture
By Euan MacLennan
22nd Jul 2013 10:32

A couple of answers
Everyone else would credit the value of assets introduced to a director's loan account, which the director can withdraw when funds permit, without any tax consequences, and leave the share capital as £1, rather than crediting the balance to a Share Premium account, which cannot be distributed easily.There is no requirement to recognise goodwill, but it would be normal to do so, again by crediting the director's loan account.  The former sole trader would have a chargeable gain liable to CGT at the entrepreneur's relief rate of 10% to the extent that the value exceeds the annual exemption of £10,900 (in 2013/14).  Goodwill attaching to the individual cannot be transferred, but if he traded through a business name there would be a value to be attributed to the goodwill of the business name and its customer base.

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Replying to Euan MacLennan:
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By gcolbourn
07th Apr 2017 16:03

"The former sole trader would have a chargeable gain liable to CGT at the entrepreneur's relief rate of 10% to the extent that the value exceeds the annual exemption of £10,900 (in 2013/14)"

Does this apply even if the gain is just owed money rather than money in the bank (i.e. credit on the director's loan account?)

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By Summerjosh
22nd Oct 2014 16:58

As the client and new/director shareholder is a related party, the company however could not claim amortisation of goodwill. So the only benefit would be a better looking balance sheet for the company (however it would show an equal liabilities side in respect of the Directors Loan account)

 

http://www.hmrc.gov.uk/manuals/cirdmanual/cird45105.htm

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