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Autumn Statement: Entrepreneurs’ Relief and goodwill

Clayton & Brewill assess the impact of changes to Entrepreneurs Relief and goodwill in the Autumn Statement.

In the early stages of business it often makes sense to begin trading as a sole trader or partnership. Once profits start to grow, your accountant will talk to you about the relative of incorporating the business – ie: becoming a limited company.

Until the Autumn Statement, an individual could get a significant tax break on incorporation, by selling the 'goodwill' (i.e.: the value of reputation, client relationships and so forth) in the business to the new, limited company entity and claiming Entrepreneurs Relief (ER) on the capital gain at 10%.

The Chancellor has however closed off this tax break and made two key changes:

1)   There will be no Entrepreneurs' Relief on disposals of goodwill when a business is transferred to a related business.

2)   Capital gains tax (CGT) will be payable at the normal rate of 18% for lower rate tax payers or 28% for higher rate tax payers on transfers between related companies.

So, as of from 3 December, a business owner can no longer claim Entrepreneurs' Relief on the sale of goodwill to a related company and any CGT will be payable at the usual rates.

In our view, incorporation will remain an attractive option for most growing businesses but the impact of this tax change should not be underestimated.

For help and advice with any aspect of tax planning call Clayton & Brewill on 0115 950 3044 or send us an email.