1. No entrepreneurs’ relief on goodwill transferred to related company
Individuals, partners and trustees who transfer a business to a related close company will no longer be able to claim entrepreneurs’ relief on the value of reputation and customer relationships (goodwill). This measure will apply to disposals of goodwill to related close companies on or after 3 December 2014.
The change has been introduced to stop the perceived abuse of entrepreneurs’ relief on incorporation of a business, particularly where the previous owners of the business sell it to the company and leave the consideration outstanding as a credit to the director’s loan account with the new company. By claiming entrepreneurs’ relief, the seller could pay tax at the rate of 10% on the value of the goodwill and make future withdrawals from the loan account free of tax.
2. Corporation tax relief restricted on transfer of goodwill to related company
The government has published draft legislation restricting corporation tax relief on internally generated goodwill and customer relationships transferred to a company by an individual who is a related party in relation to that company, or by a partnership, of which any individual member is a related party in relation to that company. The legislation to be included in the Finance Bill 2015 amends Part 8 of the Corporation Tax Act 2009, which provides for the corporation tax treatment of intangible fixed assets.
The draft legislation provides that where part of the goodwill (or other assets) transferred by the individual or partnership were originally acquired from (broadly) a third party, and there was no main tax avoidance purpose, the company will be able to claim only a proportion of the debit that would previously have been allowed. Where none of the assets transferred were acquired from a third party, no debit will be allowed. The legislation will also require the debit arising on a subsequent disposal by the company of the goodwill (or other assets) to be apportioned in the same way, with the part that relates to the internally generated goodwill being treated as a non-trading debit, thus restricting the amount than can be set against the company’s other income.
The legislation will have effect for accounting periods beginning on or after 3 December 2014, and will apply to assets transferred to a related company on or after that date, unless the transfer is made under an unconditional contract entered into before that date.
3. Entrepreneurs’ relief extended to gains deferred into EIS or SITR
With effect from 3 December 2014, individuals and trustees who are eligible for entrepreneurs’ relief will no longer have to forego this entitlement if they defer their gain into investments that qualify for Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR). Gains reinvested before this date suffer tax at the full capital gains tax rate (18% or 28%) when they come back into charge on disposal of the EIS or SITR investment. Gains deferred on or after 3 December will be eligible for entrepreneurs’ relief when they come back into charge, reducing the tax rate to 10%.
4. Close company loans to participators rules to remain unchanged
Following a review of the tax charge imposed by section 455 of the Corporation Tax Act 2010 on loans from close companies to individuals, trusts and partnerships that are participators, the government has decided to make no changes to its structure or operation.
The government initially consulted on reforms to the close company loans tax regime on 9 July 2013, but watered down its original proposals in a consultation response published on 10 December 2013. The proposals for minor change that remained involved excluding commercial transactions where no avoidance motive exists, imposing a higher tax rate for loans made to additional rate taxpayers and the introduction of a non-statutory form clarifying the information required for a repayment of tax paid under the regime.
The prevailing view amongst practitioners has always been that, as close company loans are rarely used to avoid tax, the regime should either remain as it is or be completely abolished. Therefore, this announcement does not come as a surprise.