A client is selling their business, which they purchased three years ago. They bought freehold property £200k, goodwill £50k and fixtures £20k, none of which was treated as a company asset. The business itself is run as a limited company that rents the premises from the directors and no claim for relief on the goodwill and fixtures was made by the previous accountant. The split of the sale proceeds has not been finalised.
Can I treat the disposal as purely a sale of personal assets i.e. the goodwill disposal can be set off against its cost etc. or is the business effectively a company asset on which CT would be liable on the gain?
Replies (18)
Please login or register to join the discussion.
Who owns what?
How was the business purchased 3 years ago? Was it all bought through a limited company?
How has the property been treated? Who actually owns it?
How is the business being sold? Has someone bought the assets or the shares in the company?
So fhe purchaser is not buying the shares in the company, or any assets that currently belong to the company?
So the vendors will be keeping the trading vehicle, but presumably it will not continue to trade?
Purchase agreements
What do the purchase agreements for the assets and goodwill say? Who actually purchased them, the company or the directors personally?
So you have a sale of property, goodwill and fixtures by the individuals, and a simultaneous sale of fixtures and stock by the company.
Does that answer your question?
Your question was actually "Can I treat the disposal as purely a sale of personal assets ...".
That is the question I answered.
From what you say the goodwill is clearly outside the company. So I don't see the problem.
Goodwill
Surely the goodwill must belong to the trading entity i.e. the company? The director has assets used in the trade but no actual trade himself. I don't see that he can own goodwill on its own without operating the trade to which it was attached? See here for case law which appears to support that view:
http://www.hmrc.gov.uk/manuals/cgmanual/cg68030.htm
But John clearly thinks it can be so maybe I'm wrong. I don't profess to be an expert in the law of intangible property!
If the trade was acquired and operated by the company from the start (i.e. the director never traded), then it would appear that the goodwill may have been purchased on behalf of the company by the director and has been incorrectly treated in the accounts in previous years.
With regard to the property, if a market rent has been paid, no Entrepreneurs' Relief would be available on the disposal.
Cathy
I agree with your tax manager (and Cathy)
Any sale now of the business will have a goodwill element, which absent any agreement to the contrary is the company's.
As Cathy says, the goodwill cannot exist independently of the business. The directors could personally have retained a right over the goodwill, but then I would expect there to have been some form of licensing arrangement.
You might be able to argue that the goodwill was immediately transferred to the company, along with the business, at its then market value (£50K), and the director simply retained ownership of the property outside the company.
Exactly
The directors could personally have retained a right over the goodwill, but then I would expect there to have been some form of licensing arrangement.
But they wouldn't have needed an explicit licensing agreement between themselves and their own company, as there could never have been a dispute over it could there? So the absence of an explicit licensing agreement doesn't mean that there wasn't an implicit one.
And now I agree with John :)
After a little digging, I've come across the insolvency case of Kubrik & Anor v Ucar & Anor [2013] EWHC 1499 (Ch), which is not on the BAILII website. I was only able to find it via LexisNexis.
Mr Ucar was a soletrader who transferred his business to a limited company, he certainly retained the freehold interest and nothing was expressly stated in relation to goodwill. It was held that he had retained the ownership of the goodwill, and was entitled to the proceeds that the company had received for the goodwill, when it in turn sold the business.