A client owns a successful high street outlet and is the sole shareholder/director. He is contemplating the purchase of similar business in a nearby neighbourhood. The business has a low cost base, so the value of fixed assets and current assets could be said to be nil. The purchase price in this scenario is pure goodwill at £50k.
The company has developed a website and trade secret worth at least 10k, and the opinion of an independent valuer is that tax relief could be obtained on the goodwill. However, the vendor has insisted on a share sale so that she can get business asset disposal relief.
Purchase shares as an individual, change the name of new company so that it includes brand name of existing company and run the newly named target company separately.
Drawbacks: Additional accounting costs with two year-ends;
No tax relief for goodwill;
Higher base cost of shares on eventual disposal.
Lend his existing company the £50k;
Purchase target company via existing company;
Hive up subsidiary company into parent.
Tax relief on goodwill
Simplified accounting as fewer entities
Base cost of shares nominal value
Let us fast-forward ten years and the target business is now worth £100,000 and the applicable tax rules have not changed. Except that there is no longer annual exemption for capital gains tax purposes. At this stage he wants to sell up all his business at the same time.
With option 1) the individual realises a gain on disposal of £50k which, with business assets disposal relief, results in a tax liability of £5k
With option 2) the individual realises a gain on disposal of £100k, and therefore a liability of £10k. However, in the meantime:
£50k x 6.5% x 10 = amortisation of £32,500 @ 19% is £6,175.
Reduction in distributable reserves otherwise taxed as higher rate dividend = (£32,500 – £6,175, or) £26,325 @ 32.5%, or £8,556.
In a third option, he buys the company individually. The existing company then acquires the new company. (There is no stamp on the second transaction because of acquisition relief.) Since both companies are owned by the same individual, the target company is acquired by way of director’s loan. To simplify accounting, the trade of the subsidiary is hived up to the parent.
Following the third strategy is it not possible to have a higher base cost of shares and tax relief on amortisation?
My question is related to the following discussion: https://www.accountingweb.co.uk/any-answers/treatment-of-goodwill-0