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Don't Overlook Goodwill on Incorporation

Newsletter issue - January 08.

When you transfer your business into a company you should get a valuation for the goodwill connected with that business. If that goodwill can be separated from you as a person, i.e. it is not attached to your personal skills, but relates to either the location of the business or the value of its customer base, the company can purchase that goodwill along with the other assets of the business.

This is very useful because the transferable goodwill is treated as a business asset in your hands. If the sale to the company is agreed before 6 April 2008 the gain arising on the transfer of the goodwill, which is likely to be the full sale price, will be reduced by up to 75% by taper relief. This can leave a very small gain in your hands, which may well be covered by your annual exemption for capital gains of £9,200.

The company can also benefit by purchasing the goodwill. Where your business was originally started after 31 March 2002 the cost of the goodwill can be written off against the taxable profits in the accounts of the company. It is important to establish exactly when your business commenced, as this will make a difference to the treatment of the goodwill by the company.