While stamp duty reforms may have grabbed the Autumn Statement headlines, the full 108-page document also contains measures that received rather less publicity.
One of these involves limiting the use of entrepreneurs’ relief, which reduces capital gains tax (CGT) to 10 per cent – rather than the usual rates of 18 per cent or 28 per cent – when certain qualifying business assets are sold.
Effective from 3 December, the date of the Autumn Statement, this measure means that individuals or partnerships selling their business to a limited company to which they are a “related party” – e.g. they control or have a major interest in – will no longer be able to claim entrepreneurs’ relief on the sale of goodwill, i.e. the reputation and customer relationships associated with the business.
HM Revenue & Customs (HMRC) said: “The measure removes an unfair advantage available to proprietors of businesses who sell their business to a close company to which they are related in order to extract funds from the business at a special, low, rate of CGT.
“The direct impact will be on individuals when they incorporate their business on the specified terms, rather than on the businesses itself or on incorporations generally. Capital gains tax incorporation relief remains available, subject to the relevant conditions being met, and where it is due there will be no CGT charge on the incorporation of a business.”
The Autumn Statement also introduced a related measure restricting corporation tax relief, where a company acquires internally generated goodwill from related parties on incorporation.
This measure will be included in the Finance Bill 2015 and, subject to Royal Assent, will apply to all transfers on or after 3 December 2014 unless certain conditions apply. Goodwill acquired prior to the date of change will be unaffected.
Milsted Langdon tax partner Rob Chedzoy said “It is disappointing that HMRC appear to be looking to treat goodwill in a different manner to other trading assets transferred into a limited company on incorporation.”
“Although goodwill can often give rise to valuation difficulties, it is often a very important part of the asset base on incorporation, and it does seem to be unreasonable to be singling this out for a different treatment. Although other forms of incorporation relief remain available, this will undoubtedly cause many unincorporated businesses to reconsider the benefits of incorporation, something which previous government policy decisions had sought to encourage.”
For more information on the changes, or advice on any aspect of incorporation or entrepreneurs’ relief, please contact us.