There was some pretty bad news for many profitable sole traders and partnerships from the Chancellor in last week's Autumn Statement.
For many years, there's been an opportunity to (quite legitimately) save some tax when transferring an unincorporated business (i.e. a sole trader or partnership business) into a limited company. If one could reasonably argue that there was some intrinsic value to the business above and beyond just the skills of the owner - effectively, that there's a value there that might plausibly make it a saleable business to a third party - then you could quantify that value and sell it to the company. That created two tax savings. First, a one-off capital gain for the owner - generally taxable at a lower rate than income. Second, an ongoing saving for the company, which could claim tax relief on the cost of the goodwill, over a period of years. It was a great opportunity for a business of genuine value, and was a mainstream and commonly used tax planning strategy, often generating some really big tax savings.
As of last week, it's gone. You can still make the transfer of course, and can still place a value on the goodwill. However, one tax advantage has gone and the other is severely diminished. The company can no longer save tax on the goodwill. And although there still might be a modest tax saving for the individual on a fairly small goodwill valuation and capital gain, the bulk of the personal saving was generated by making a claim for something called Entrepreneurs' Relief - and you can no longer make that claim in those circumstances.
So pretty bad news for a lot of businesses that were planning such a move, which nobody saw coming at all. If you were planning on making a shift into a limited company, it's still very likely to be worth it, since the ongoing tax and National Insurance benefits are unchanged. But that one-off boost is pretty much a thing of the past.
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