Until Wednesday’s Autumn Statement, there were good tax breaks for a person or partnership which incorporated their business and selling their goodwill to the new company that was set up to operate the business going forward. The sale of the goodwill usually attracted a tax rate of 10% in the hands of the sellers and the company could also get tax relief on the amount of goodwill that was written off in its accounts each year under generally acceptable accounting standards. As the company could not usually afford to pay for the goodwill in cash, a loan account in favour of the sellers was created on the sale. Once the tax of 10% was paid out of this account, the balance of the loan could be withdrawn free of tax.
Until now that is!
For incorporations from today onwards, the sale of goodwill to the new company will no longer attract the 10% tax rate and instead, the rate of tax will be 18% or 28%, depending on the circumstances of the seller. In addition, the company buying the goodwill will no longer be able to claim tax relief on the amount of goodwill written off each year as set out in the Press Release which followed the Autumn Statement.
These changes will clearly have a big impact on whether an unincorporated business should change into a limited company. There may still be some tax breaks but the juiciest ones are no longer available.
Do contact us to help you with your incorporation.