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CG34 Post Transaction Valuation, CGT and Entrepreneurs Relief

CG34 Post Transaction Valuation, CGT and...

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I have a client who has just incorpated his sole trader business and I am now looking at valuing the Goodwill on the transfer. This is my first time so here is my thought process and would be grateful for comments/suggestions if this is wrong.

Firstly, he has £16k worth of assets being transferred (tools and equipment) valued at market value (think he used ebay) as at the date of commencement of the Ltd company.

Secondly, I value his goodwill at £60 which is the total of the last 3 years net profits per self assessments.

I have seen where to enter these figures on his next SA and propose to offset full £76k against Entrepreneurs Relief as all was sold as a going concern - therefore CGT liability should be nil.

Does this sound OK and would you still complete CG34 form or not bother?

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By Peter The Painter
24th Jul 2014 14:27

Entrepreneurs Relief

Let's ignore the valuation issues and concentrate on the easy bit. If the assets disposed of are worth £76K surely you deduct the annual exemption and tax the remainder at 10%, yes or no?     If someone is going to value the business they will need to know what it does, how many staff are involved, how long it has been established,  what type of contracts are in place, is your client contractually tied to the company, etc.  

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Man of Kent
By Kent accountant
24th Jul 2014 14:31

You don’t have to submit a

You don’t have to submit a CG34, but it makes sense to do so. Do you want HMRC to query the valuation in the future?

Assuming that your client wants to create a directors loan account balance to drawn down in the future you should also elect for s162 TCGA92 not to apply.

Even if entrepreneurs relief applies there will still be a capital gains tax liability – 10% of profit on sale (after CGT allowance).

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By ireallyshouldknowthisbut
24th Jul 2014 14:36

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First up, is there any genuine goodwill that is separate to the individual?

If it is genuine, could he have really sold his business for £60k on the open market?

What are other business like this being sold for?

This suggests he is only making £20k per annum profit and so I imagine by the time you deduct a market rate for the owners time (ie the cost you would incur paying someone to do the job) there is no "super profit" as such unless this is a part time business, so there may be little if any goodwill to sell, or if it is it might be valued at something like 1 years total profits and not 3.

 

CG34, yes you should even if they are ignored they are good "insurance". 

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By AndersonAccountancy
24th Jul 2014 15:05

The valuation of £60k is

The valuation of £60k is based on £4k year 1, £16k year 2 and £40k last year. Profits are likely to be much higher this and next year as the company has been awarded a huge contract hence the reason for incorporating.

What I was trying to work out is how to write in the goodwill on incorporation (i.e. he sold his S/T business to a Ltd Company) and top create a directors loan for him to draw from as and when.

Does this help?

If I am going about this the wrong way, or there is a better solution, please comment - any help is appreciated.

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By ireallyshouldknowthisbut
24th Jul 2014 15:13

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Well the double entry would be Dr Goodwill, Cr Loan account.

If this is well outside your comfort zone (happens a lot at the start) then what I do is use a tax consultancy to talk it through properly rather than rely on us lot. Chances are they will come up with a number of things you didn't know. Well worth a couple of hundred pounds. 

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Teignmouth
By Paul Scholes
24th Jul 2014 15:33

Some key points above

Hi - there are a few key points made above that could completely change a simplistic last 3 year's profits valuation.

You do have to put yourself in the mind of a prospective purchaser and so, whilst the last 3 years may be a guide, what are the profits likely to be in the future, this is what the company is buying?  This could substantially increase the profit you use.

Did you get the point about management charges?  If the sole trader made a profit of £40K how much would it have been had the business had to pay a manager to manage it, or someone to do the work?  This is what a prospective buyer would factor into their calculations and so a £40K profit could end up as zero.

The large contract is also important and, in some cases I value these independently, then add on a general value for the business.  Is the contract with a reputable company, how long is it for and, most important, is it actually transferable, ie has the customer agreed to a change in the supplier?  This leads on to the next point.

Probably the biggest single risk in this type of arrangement is, as mentioned above, personal goodwill.  If the contract can't be changed, why not, is it because they just want the person to carry it out?  If so then, as I've found in some cases, you may have the biggest profits and best contracts in the world, but if they all rely on one person's expertise, the "business" goodwill can be next to nothing.  This is why staff, premises, and even a different business name to that of the owner, can be used to say that the profits are made by the business and not the person.

Hope that helps.

 

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By Briar
24th Jul 2014 16:13

Many good points above

Good advice above. One aspect not covered, once one arrives at maintainable profits (after management remuneration and other adjustments), is the expected rate of interest to be used against the profits figure. Recently, after subimitting a CG34, HMRC have agreed a rate of return of 20% with me for a small business which gives a  multiple of 5 times profits. But, (before anyone comments) I agree, that that rate can be different in other circumstances.

Advice about seeking specialist advice is very good if you have not valued goodwill before or feel uncomfortable about being able to defend your workings (to be submitted with CG34) with HMRC. If you are the AndersonAccountancy in Romsey (per Google search) or the other one in Bath, after reading your backgrounds, I would definitely recommend specialist advice.

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By AndersonAccountancy
25th Jul 2014 08:57

Some very good points raised and thank you all for your time.

I will definitely get some specific advice in this area - we all have to start somewhere and whilst I thought this would be an easy thing, the potential for problems is very evident.

Once again, many thanks guys.

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By martinscutt
25th Jul 2014 09:58

Tools and equipment

Generally not subject to CGT. Presumably they have been capitalised in in the sole trader accounts and AIA/CA's claimed (except when bought in the year of cessation).

Seems unlikely any are chargeable assets in a pool of £16K there will simply be a balancing allowance/charge in your final accounts depending on whether you use an amount between £1 (proceeds) to original cost or make a joint election to transfer at tax written down value. The choice as to what value to use is a tax planning matter.

Goodwill is your only chargeable asset from what I can see

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