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Goodwill on incorporation for sole turning limited

Is there a tax reason for showing goodwill other than true and fair view

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The Entrepreneur’s Relief benefit on incorporation been taken away, plus the tax benefit on amortisation been taken away too. So what are the benefits of showing goodwill in the accounts when transferring a sole trade business into ltd company for an individual ? Entries in the acocunts are debit Goowill and credit Share Capital i.e. incorporation relief.

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By The Dullard
13th Feb 2020 14:04

1. It's the correct way to do it.
2. CTA 2009, s 845.
3. What happens if/when the client sells the business at a profit (other than by way of a share sale). It's only the debits that are not allowable (amortisation) or non-trade (others).

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Replying to The Dullard:
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By Lisa09
13th Feb 2020 14:13

Thank you for the reply.
Just the point 3 could you explain a bit more on this please.

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Replying to Lisa09:
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By The Dullard
13th Feb 2020 14:23

Well, let's say the goodwill is worth £100K now, and it gets sold in a year's time for £200K. How much would you like to deduct in calculating the taxable credit?

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Replying to The Dullard:
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By Tax Dragon
13th Feb 2020 14:25

Although... in this case the tax treatment flows purely from tax law. (If the accounts show something else, that just means the accounts are wrong.)

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Replying to Tax Dragon:
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By Lisa09
13th Feb 2020 14:36

Yes, If the business gets sold in the near term on the assets basis then having a value would make a difference to the taxable credit. However, if the business gets sold via shares i.e. owner sells the shares (which is true in most cases) then would goodwill have made a difference. For example, if owner sells one share for £100,000 or 100,000 for £100,000

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Replying to Lisa09:
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By The Dullard
13th Feb 2020 14:38

So, you want to ignore 3 on the basis that there will probably be a share sale, if there's a sale at all. So, 1 and 2 then...

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Replying to Lisa09:
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By Lisa09
13th Feb 2020 14:40

i'm not an expert on these, hence the questions and these may be coming across as very inexperienced (said mildly).

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Replying to Tax Dragon:
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By The Dullard
13th Feb 2020 14:37

Wasn't that kind of the question? Is there any tax reason to dispense with proper accounting treatment (ie to just show the relevant tax balances), I thought tat was the question, but I might have misread it. I'm not very good with words.

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Replying to The Dullard:
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By The Dullard
13th Feb 2020 14:40

I really fuching hate the way this site ends up laying out threads in a completely meaningless fashion!

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Replying to The Dullard:
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By Lisa09
13th Feb 2020 14:50

I am understanding that if you feel there is goodwill then it has to be recorded (forget tax benefit or not). I was asking because goodwill value is somewhat open to interpretation, there isn't anything to absolute prove it exists.

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Replying to The Dullard:
RLI
By lionofludesch
13th Feb 2020 15:58

The Dullard wrote:

1. It's the correct way to do it.

Forget everything else.

This is the one.

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Replying to lionofludesch:
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By Lisa09
13th Feb 2020 16:15

Apologies, had to go away for a little

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Replying to Lisa09:
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By Lisa09
13th Feb 2020 16:21

Thank you all for the reply. I do appreciate. The answer is that if there is intangible asset (goodwill) then it has to be recorded. Reason for my question was that a client had a small private nursery (self-employed) and recently they have started trading as a ltd company. I was thinking if should consider goodwill and if there are any benefits. They did earn approx £50k year before when self-employed.

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By Tax Dragon
13th Feb 2020 14:05

Aren't accounts supposed to show what happened?

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Replying to Tax Dragon:
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By Tax Dragon
13th Feb 2020 14:49

Why's everyone apart from me talking to themselves?!

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Replying to Tax Dragon:
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By The Dullard
13th Feb 2020 14:54

I spoke to you, but then my reply got separated from the post I was replying to by the OP replying to me and me then replying to the OP. in consequence of which I then replied to myself. Don't take it personally.

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Replying to The Dullard:
Oaklea
By Chris.Mann
13th Feb 2020 15:39

I usually end up talking to myself, later in the day.

It's called Merlot - (hic)

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Replying to Chris.Mann:
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By Lisa09
13th Feb 2020 16:23

Sorry, I understand the annoyance. The main conversation started on one thread and I just kept on replying on that.

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Replying to Chris.Mann:
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By Dib
13th Feb 2020 17:30

Wouldn't happen if you drank less - Mer-little for example. :o)

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Replying to Tax Dragon:
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By Matrix
13th Feb 2020 16:24

What would the accounting entry be then? Dr Goodwill Cr share capital doesn’t look right.

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Replying to Matrix:
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By The Dullard
13th Feb 2020 16:26

And credit share premium, to the extent that the value of the goodwill exceeds the nominal value of the shares.

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Replying to The Dullard:
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By Matrix
13th Feb 2020 16:34

Ok thanks. So what is the benefit of doing this? When and how would you use the share premium?

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Replying to Matrix:
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By The Dullard
13th Feb 2020 17:26

The benefit is getting incorporation relief and so not paying CGT on the goodwill be transferred in to the limited company, which CTA 2009, s 845 deems to take place at market value for all purposes of the Taxes Acts and which TCGA 1992, s 17/18 also deems to take place at market value.

The alternative is Dr Goodwill, Cr Director's Loan and pay the CGT.

The OP had indicated that incorporation relief applied.

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Replying to The Dullard:
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By Lisa09
13th Feb 2020 19:32

I need to hold back on the excitement for a little while, appears the issues (for me) is not fully resolved yet. The question is around share capital and share premium. For example, a goodwill of £50,000 what would double entries be, considering there already is a share capital of 1 when set up the company and planning incorporation relief (deferring tax). Would appreciate a reply please.

Would it be Dr Goodwill 50,000 and credit share capital 50,000 (issue new shares at nominal value)

Or would it be Dr Goodwill 50,000 and credit share premium 50,000 (no new shares issued)

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Replying to Lisa09:
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By The Dullard
14th Feb 2020 11:11

You do need to issue new shares to get incorporation relief, but 50,000 shares is a bit extreme. Given that there's one share already why not issue a further 99 (£1) shares, then the accounting entries are:

Dr Goodwill £50,000
Cr Share capital £99
Cr Share premium £49,901

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Replying to The Dullard:
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By Lisa09
14th Feb 2020 12:23

Thank you for the reply. This is really helpful.

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Replying to The Dullard:
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By Lisa09
13th Feb 2020 16:35

More to think. Maybe I need to consider share premium too
As an example, I was thinking about issuing new shares to the value of goodwill, each share nominal £1 i.e.
Dr Goodwill £50,000
Cr ordinary share capital(nominal value) 50,000

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