After the ruling in the Wildin case, Peter Rayney says the value of goodwill must be commercially sustainable. Over the last decade or so, many tax advisers and accountants have had to dust down their goodwill valuation texts
This is largely due to the significant increase in the incorporation of existing businesses and professional partnerships, such as accountants, lawyers, dentists and so on.
Furthermore, the vast majority of these incorporations tend to be structured as an asset sale at market value. This sale structure has significant tax advantages. The proprietor/partner sells their goodwill to the (new) company at its market value (along with the net tangible assets).
In the majority of cases, the company has little or no opening cash funds, so the consideration value of the transferred assets is normally credited to the director’s loan account.
However, since the capital gain on the goodwill would invariably qualify for entrepreneurs’ relief (ER), it will only be taxed at the beneficial 10% ER capital gains tax (CGT) rate. The proprietor/partner therefore often creates a substantial credit balance on their loan account for the sale value of the goodwill at an effective tax cost of 10%.
