Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

Client Area Client Area

Magnify

Accounting, Taxation and Business Advisers

Call us today: 0118 405 6000 (Local Rate)

Request a Callback

Book a Free Consultation

Get a Fixed Quote

Find out how to Make more, Keep more and Work less

Want to pay less tax?

Newsletter Sign up

What size is your
business?

We know you love your business regardless of it's size, so let us offer you sound financial advice

  • Start-up
  • Small Business
  • Medium Business
  • Large Business

How to Cash-in on Goodwill

Newsletter issue - August 07.

When you transfer your existing unincorporated business into your own limited company you could sell the goodwill that has built up in the business to the company for a tidy sum, then draw that amount out of the company tax-free over a number of years. It works like this:

Say your business has built up a loyal bunch of customers who generate around £100,000 of income after expenses for the business each year. After deducting your salary of £40,000, you have £60,000 of net profits. The goodwill created by these customers could be valued at a multiple of say 2.5 giving a value of £150,000. You sell the details of the customers to the new company for £150,000, but it leaves the amount owing as a loan to you in the company books.

The sale of the goodwill is a capital gain in your hands, but if your business has been running for at least two years the gain should qualify for full business asset taper relief, leaving only 25% taxable. After deducting your annual exemption of £9,200 (for 2007/08), you have a taxable gain of £28,300, on which you pay tax on this at 40%: £11,320.

The company can pay you £11,320 out of the loan account when you need to pay the tax due, then you can gradually withdraw the balance of £138,680 as you need the cash, with no further tax to pay. With a lower valuation you could actually avoid any tax bill at all on the gain.

The goodwill you sell to the company must be genuine free goodwill, and not tied to you or a particular location. Goodwill associated with the premises you operate out of can't be transferred, unless you also transfer those premises to the company. The goodwill in most one-man businesses is tied to the skills and personality of the business owner and can't be transferred to a company.

 

  • Share on Facebook
  • Share on LinkedIn
  • Share on Twitter
  • Email this page to a friend