Incorporating your own business is no longer as attractive as it was

Categories: Business Start-ups

The media has focused on the changes to stamp duty but there are some other changes that effect business owners that are worthy of note. One interesting development was on incorporation of businesses.

It has been commonplace for a number of years for sole traders to think about  incorporating their business and to claim entrepreneur’s relief on the disposal of the goodwill to the company, which at times has been overvalued well at least in the eyes of HMRC.  The company then claims tax relief on the goodwill whilst the previous owner withdraws the money from the company in the form of a debt repayment.

This arrangement has now been attacked by the Chancellor in that the entrepreneur’s relief at the rate of 10% is no longer available on the disposal of the goodwill nor is the ability of the company to write off the goodwill against tax going forward.  This only relates to transactions between related parties. Obviously, if the disposal is between unrelated parties at arms’ length, this does not apply.

It is still possible to incorporate a business in this way and to withdraw the debt for the goodwill as a way of keeping income below higher rates but the scenario is now much less attractive.

If there is anything in the summary you would like to talk about, please get in touch.