THE Chancellor’s autumn statement brought very few radical changes to the tax regime other than the usual tweaking of income tax allowances and the like.
However, one of the more unexpected changes was the amendment to the capital gains tax regime, more specifically the entrepreneurs’ relief provisions applying to the capitalisation of goodwill on incorporation of a sole trader or partnership business.
Under the previous rules taxpayers could enjoy generous tax breaks upon incorporating their business and capitalising the goodwill relating to the same operations.
THE Chancellor’s autumn statement brought very few radical changes to the tax regime other than the usual tweaking of income tax allowances and the like.
However, one of the more unexpected changes was the amendment to the capital gains tax regime, more specifically the entrepreneurs’ relief provisions applying to the capitalisation of goodwill on incorporation of a sole trader or partnership business.
Under the previous rules taxpayers could enjoy generous tax breaks upon incorporating their business and capitalising the goodwill relating to the same operations. This meant that they would pay capital gains tax at a rate of 10 per cent on the goodwill element of their business, taking advantage of entrepreneurs’ relief.
They could then draw against the proceeds of this deemed disposal to shelter their taxable income from higher rates of personal tax. Given the rates of tax that corporate entities pay on their taxable profits this would often substantially decrease the amount of tax that an individual would pay for a couple of years. On 3 December these rules changed and now these disposals do not qualify for entrepreneurs relief, so capital gains tax is now payable at a rate of 18 or 28 per cent on any such disposals where a goodwill element is specified.
While not as advantageous as it was from a tax perspective, this change should not deter people from considering incorporation as an option. Incorporating a sole trader or partnership business can still be beneficial in terms of the reducing the overall tax burden payable and a corporate structure obviously affords significantly more protection to potential liabilities than a sole trader enjoys.
We would suggest that if you are considering incorporating a sole trader or partnership business then you should seek appropriate advice to you access all available benefits.
If you would like to discuss the contents of this article or any other accountancy or business matters contact Gavin Parsons on 01604 746760 or