IFAs to lose out with goodwill taxation clause

Any IFA who wishes to incorporate before the end of trail commission will find himself caught out by the removal of entrepreneurs’ relief on goodwill, Sue Moore has warned.

The technical manager, private client, tax faculty for the Institute of Chartered Accountants in England and Wales, said that with the end of trail commission, IFAs can no longer value their business based on recurring trail but must rely on the goodwill attached to their services for valuations.

However, goodwill is now taxable, under changes to the entrepreneurs’ relief announced by chancellor George Osborne in the Autumn Statement, which could have tax implications for advisers.

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Ms Moore said that, for many years sole traders and partnerships have been able to incorporate their businesses, selling the value of the business, including goodwill, to the new corporate.

The gain is taxed at 10 per cent, the proceeds remain on loan to the company as a directors’ loan and it is then repaid with no further tax being payable.

This procedure was used when retirement relief was available, and then taper relief and more recently entrepreneurs’ relief.

With effect from 3 December 2014 any goodwill sold to a closed company connected with the seller will be taxed at 18 per cent or 28 per cent, depending on the personal circumstances of the vendor.

Ms Moore said: “This will apply to any IFAs who still want to incorporate, because from 2016, when the sunset clause on trail comes to an end, they will no longer be able to incorporate tax-efficiently.”

This could make it less attractive for advisers wishing to sell up and retire.

In the three-page Capital Gains Tax: Denying Entrepreneurs’ Relief for Disposals of Goodwill to Related Companies, published alongside the Autumn Statement documents, the government said: “Goodwill is not one of the relevant business assets comprised in the qualifying business disposal.”

Industry view

Brian Spence, managing partner at Harrison Spence, said IFAs should not be too worried by the changes. He added: “It is very much a seller’s market at the moment with some valuations being quite high for quality businesses, so this would offset any removal of the entrepreneurs’ relief on goodwill.”