I have a client who is looking to incorporate his sole trade into his existing limited company. The sole trade has no physicial assets, but the goodwill may be worth up to £50k. The hope is that £12.3k of the value of the sole trade can be credited to the owner's current account, with no capital gains tax liability arrising. I understand that this would be achievable by agreeing to sell the sole trader goodwill to the limited company for £12.3k, and then making a joint holdover relief claim (S165) within the next 4 years. If holdover relief is claimed, no valuation of the goodwill would be required.
Assuming that the goodwill had no base cost for CGT purposes and that the goodwill was valued at £50k, after the transaction has taken place the individual would have a capital gain of £12.3k and £37.7k of the gain would be heldover against the goodwill in the company.
After the transaction had taken place, the company would have a goodwill asset with a book value of £12.3k. Should the company ever look to sell the goodwill, it would trigger the £37.7k heldover gain, and this would be subject to corporation tax. It most cases, it is unlikely that the company would ever sell the goodwill, and therefore the gain would never become taxable. Although the £12.3k will likely be covered by the annual allowance, any gain not covered would not be eligible to business asset disposal relief as the transaction is between related parties.
If in a number of years time, the individual sold his shares in the company, the held over gain would be irrelevant as it attaches to the goodwill and not to the individuals shares. Assuming that the conditions of business asset disposal relief are met (and that BADR still exists), the individual would only pay 10% CGT on the gain that is in excess of their annual allowance. The gain would be calculated as the proceeds less the amount he originally paid for the shares.
If someone could just review my understanding and let me know anything I have misunderstood, it would be appreciated.