Can you use personal goodwill to reduce your tax and is it legal?
Five years ago, Mr X loaned company Y £4 million to buy his personal goodwill and a tax charge was created. Mr X paid £400,000 tax on the sale. Over five years company Y amortised the value to zero. Y has no turnover and no tax relief, so it appears that Company Y's sole purpose is to reduce the liability for inheritance tax (IHT) in Mr X's personal goodwill. When Mr X dies, his brother inherits the business. Its only asset is goodwill so, in effect, a potential liability for 40% tax on the inheritance has been reduced to 10% paid by Mr X. How can a non-trading company borrow £4 million to buy the asset and amortise it to zero without ending up with a £4 million deficit in the account? Is (or was) this legal before 2015?

Arthur Weller replies:
Even though the company may have amortised the goodwill, that is only for tax purposes. In actuality the goodwill is still in the company. So the company is still worth £4 million, or thereabouts. However, if the company never paid back to Mr X the £4 million that it owed him, the company in reality is not worth anything, because it has a debt equal approximately to its asset. It would seem that Mr X personally has simply swapped the goodwill asset for a debt. It could be that the goodwill would have been eligible for business property relief, but not the debt from the company. So from an IHT perspective, I don't think that Mr X is any better off.

This question was first printed in Business Tax Insider in April 2017.

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