Autumn Statement 2014: Incorporation – restriction of relief for intangibles and entrepreneurs’ relief

To date, a sole trader or a partnership carrying on a trade could transfer its business to a limited company and claim entrepreneurs’ relief (ER) on the gain from the disposal of the goodwill or other intangible. The director’s loan account created on incorporation could then be drawn down without any further personal tax liabilities.

This meant that the individual paid CGT at 10% and the company paid corporation tax at 20% on the profits used to repay the director’s loan account. If the business had not been incorporated, income tax would have been paid on those profits at rates of up to 45%, and there would also have been a class 2 and class 4 NIC liability.

At the same time, when the company acquired goodwill created on or after 1 April 2002, it could claim corporation tax relief for the amortisation of the goodwill.

With effect from 3 December 2014 a new section 169LA will be inserted in the TCGA 1992, so that where goodwill is transferred to a close company and the transferor(s) are related to the company (using the related party definition for intangible assets purposes in s 835 CTA 2009) the goodwill will not be treated as a relevant business asset. This means no relief is available for the amortisation.

Additionally, ER will not be available on the disposal of the goodwill or other intangibles on incorporation where the transferor or any associates have shares in the company. The gain on disposal of the goodwill will be taxed at the normal CGT rates of 18% or 28%.

If other chargeable assets are transferred into the company as part of the incorporation, ER would be available on those assets.

This measure restricts entrepreneurs’ relief (ER) and corporation tax (CT) relief on transfers of the reputation and customer relationships associated with the business, where the transfer is to a close company to which the seller is related.

The measure will:

  • deny ER on intangible assets which are transferred to a close company which is related to the transferring entity.
  • restrict CT relief when a company acquires intangible assets from related individuals on the incorporation of a business.

Transfers of intangible assets to third parties will not be affected. This will allow incorporated and unincorporated businesses to compete more fairly.

Both ER and CT relief will be restricted for transfers and incorporations from 3 December 2014.