Jamie has been running his business as a sole trader for a number of years and now wishes to incorporate. He has goodwill in his business worth £50,000. He has built up this goodwill from scratch. If he chooses to transfer the goodwill into his new company by way of gift, no capital gains tax (CGT) liability will result. If on the other hand he chooses to sell his goodwill to the company for £50,000 a CGT liability of £1,920 will arise:
|
£
|
|
| Sale Proceeds |
50,000
|
| Less: Taper Relief (75%) |
37,500
|
|
12,500
|
|
| Less: Annual Exemption |
7,700
|
|
4,800
|
|
| CGT @ 40% |
1,920 |
By adopting a middle course of sale to the company for less than the goodwill is worth, Jamie could avoid a CGT liability altogether.
If he were to sell the goodwill for £30,800, taper relief at 75% and the annual exemption would wipe out the gain and therefore any CGT liability. In other words, Jamie has the facility to extract funds of £30,800 from the new company tax-free.
If Jamie is aged at least 50 and eligible for full retirement relief then assuming the incorporation takes place by 5 April 2003, he could sell the goodwill to the company for £50,000 tax-free because the whole gain would then be covered by retirement relief.