Considering buying a business? Consider the tax relief involved

Date

Oct 06, 2015

Categories

Business Advice Tax

If you’re thinking of buying a business, you may well be aware that tax relief on the purchase is an important consideration. Two particular areas to be aware of are goodwill and capital allowances.

Goodwill
Ever since April 2002, when a limited company has acquired the trade and assets of another business it has been possible to obtain a tax deduction for the goodwill and other intangible assets of the acquired business, generally in line with the accounting treatment. So, if the goodwill of the acquired business was worth say £500,000, and the directors then assess that its useful economic life is 5 years, there would be an allowable tax deduction of £100,000 a year over the 5 year period.

However, the Summer Budget has now blocked this deduction in those cases where the goodwill was acquired on or after 8th July 2015. (If the acquisition was prior to that date then tax relief continues to be available.) Be aware that the new restriction applies to goodwill and “customer-related assets”, which would include client lists and customer databases. It does not, however, apply to other intangibles, such as patents and manufacturing “know –how”. Therefore the way in which the purchase price of assets is allocated in the sales and purchase agreement may have an important impact on the availability of tax relief.

Capital Allowances
Tax relief is also available for the plant and machinery of an acquired business. In the situation where shares of a new company are gained, a new owner will inherit the tax written down value in the new company’s capital allowances pool, which will normally be a lot lower than the market value of the machinery.

This is another reason why a trade and asset purchase would be preferable for the buyer, as they would acquire the plant and machinery at the agreed market value. Where fixtures and fittings within buildings are acquired it is even possible, by agreement with the vendors, to acquire those items at the original purchase price. Remember that the current Annual Investment Allowance that gives 100% relief on plant and machinery reduces to just £200,000 from 1st January 2016.

If you’re thinking of buying a business, please get in touch with one of our team as we can help you maximise tax relief on the assets you acquire.