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Denying ER for disposals of goodwill to related companies


Who is likely to be affected?

Individuals, trustees and members of partnerships who transfer their business to a close limited company in relation to which they are a ‘related party’, and receive consideration in the form of cash or debt.

General description of the measure

The measure will mean that entrepreneurs' relief (ER) will not be available to reduce capital gains tax (CGT) on disposals of the reputation and customer relationships associated with a business (the ‘goodwill’) to a close company to which the seller is related. This change is made alongside a measure to restrict corporation tax deductions when goodwill is acquired from a related party on incorporation.

Policy objective

The measure removes an unfair advantage available to proprietors of businesses who sell their business to a close company to which they are related in order to extract funds from the business at a special, low, rate of CGT rather than the normal rates of income tax and national insurance contributions.

Background to the measure

The measure was announced at Autumn Statement 2014.

Detailed proposal

Operative date

The measure will apply to disposals of goodwill to a related close company on or after 3 December 2014.

Current law

The ER provisions are at sections 169H – 169S Taxation of Chargeable Gains Act 1992 (TCGA). ER reduces the rate of CGT on the disposal of all or part of a business to 10 per cent, from the normal 18 per cent or 28 per cent. Gains and losses on relevant business assets (defined at section 169L) are combined and the net gain taxed at the reduced rate.

Proposed revisions

Legislation will be introduced in Finance Bill 2015 to amend TCGA in order to exclude goodwill from the definition of 'relevant business assets' at section 169L TCGA, so that gains on disposals of goodwill to a close company by an individual who is a related party (under the definition at section 835 Corporation Tax Act 2009) will be charged at the normal rates of CGT (subject to other reliefs).

Published December 2014