B9.120 Incorporation—treatment of goodwill
The unincorporated business may consider a sale of goodwill at full market value to the company with the credit of a corresponding amount on director's loan account, but see below for HMRC's views. Given that sale proceeds will often be paid out over a number of months, if not years, the funds to pay any CGT may not be available initially. In practice, however, there will often be a significant lead time between the sale of the goodwill and the date when tax becomes payable, ie 31 January following the end of the tax year in which the gain arose.
Molly, a higher rate taxpayer has built up her messaging service, 'We Can Find U', over many years. On 1 September 2019 she sold it to her new company We Found You Limited for £540,000 of which £500,000 is a capital gain. The sale proceeds were left on loan account initially and are being withdrawn in instalments of £10,000 per month.
As the sale took place in 2019/20, the CGT (£500,000 × 20%) of £100,000 will not be payable until 31 January 2021, some 17 months later. There will be no other tax or NIC to pay on the £10,000 monthly drawings over the four-year period through to September 2023. The company will, of course, pay corporation tax on its profits during this period. It will be the post-tax profits that fund the loan repayments.
Business asset disposal relief
Business asset disposal relief (formerly entrepreneurs' relief) is not available