Value of goodwill calculator

When you transfer a business to a limited company, you need to calculate the value of the goodwill in it. If HMRC doesn’t agree with your valuation, the difference between its (lower) and your (higher) valuation will be taxed on you. A document showing how you arrived at the calculation of goodwill which also includes a price adjuster clause should help to avoid this potential tax problem.

Incorporating a business

You may have started as a sole trader or a partnership but have now decided to incorporate your business. When you transfer a business to a limited company you need to calculate the value of the goodwill in it. The larger the goodwill figure, the more money you can take out of the company tax free. As you are gifting business assets, you can claim gift relief on the transfer and therefore defer any CGT liability on the gain. Use our Value of Goodwill Calculator to estimate the value of goodwill in your business.

Price adjuster clause

You should also include a price adjuster clause in your valuation so that the figure can be automatically varied if HMRC doesn’t agree with the valuation. This will avoid the possible problem of any difference between its (lower) and your (higher) valuation being treated as taxable, as a distribution which could result in a tax charge of either 25% of the amount overpaid for higher rate taxpayers or 30.56% for additional rate taxpayers. With a price adjuster clause, if the goodwill value is challenged by HMRC, the difference between its valuation and the original one is treated as a reduction in your director’s loan account balance, therefore eliminating the tax charge.

It’s best to ask HMRC to agree your valuation (in advance of submitting your tax return) by completing Form CG34 (http://www.hmrc.gov.uk/forms/cg34.pdf).