Key facts
- Self-generated goodwill has a base cost of nil for CGT purposes — the entire value is a chargeable gain.
- For companies, goodwill acquired from related parties after 3 December 2014 cannot be amortised for tax purposes.
- Companies follow the intangible assets regime (Part 8, CTA 2009) for goodwill and other intangible assets.
- Goodwill qualifying for the intangible assets regime can be amortised or written down for Corporation Tax.
- The related party restriction was designed to prevent tax-motivated incorporations.
What Is Goodwill?
Goodwill is the value of a business over and above the sum of its identifiable tangible and intangible assets. It encompasses the customer relationships, reputation, brand recognition, workforce, and other factors that make a business worth more than its balance sheet assets.[1]
For tax purposes, it is crucial to distinguish between:
- Self-generated goodwill — built up by the business owner over time (base cost of nil)
- Purchased goodwill — acquired as part of a business purchase (base cost equals the amount paid)
CGT Treatment for Individuals
When an individual (sole trader or partner) disposes of goodwill, the gain is calculated under normal CGT rules:[1]
| Scenario | Base Cost | Gain |
|---|---|---|
| Self-generated goodwill sold for £300,000 | £0 | £300,000 |
| Purchased goodwill (cost £100,000) sold for £300,000 | £100,000 | £200,000 |
The gain is taxed at the individual’s marginal CGT rate (18% or 24% for 2025/26), unless Business Asset Disposal Relief applies, reducing the rate to 10%.
Goodwill on Incorporation
When a sole trader incorporates, goodwill transferred to the company is a disposal at market value. Incorporation relief (s.162 TCGA) can defer the gain into the base cost of the shares received. However, the company will be unable to amortise this goodwill for tax purposes if the individual holds 5% or more of the shares (which is virtually always the case on incorporation).
The Intangible Assets Regime (Companies)
Companies do not pay CGT on goodwill. Instead, goodwill falls within the intangible assets regime under Part 8 of the Corporation Tax Act 2009.[2]
Under this regime:
- A company can claim a tax deduction for amortisation of goodwill (matching the accounting treatment)
- Alternatively, the company can elect for a fixed 4% writing-down allowance per year
- On disposal, the profit or loss is treated as income (not a capital gain)
The Related Party Restriction (Post-2014)
Finance Act 2015 introduced a major restriction on the tax treatment of goodwill acquired from related parties. For goodwill acquired on or after 3 December 2014:[3]
- If the goodwill is acquired from a related individual (or partnership) who holds 5% or more of the company’s ordinary share capital, the company cannot claim any tax deduction for amortisation or write-down
- On subsequent disposal by the company, the full proceeds are taxable as income with no deduction for the cost of the goodwill
Why was this restriction introduced? Before December 2014, a common tax planning strategy was to incorporate a sole trader business, transfer self-generated goodwill to the company (deferring the individual’s CGT via incorporation relief), and then have the company amortise the goodwill for Corporation Tax relief. This gave a “double benefit” — no CGT on incorporation plus an ongoing CT deduction.
Other Intangible Assets
The intangible assets regime covers a wide range of assets beyond goodwill:
| Asset Type | Individual Treatment | Company Treatment |
|---|---|---|
| Goodwill | CGT | Intangible assets regime |
| Patents | CGT | Intangible assets regime |
| Trademarks | CGT | Intangible assets regime |
| Copyrights | CGT (or income tax if author/creator) | Intangible assets regime |
| Know-how | Income tax on sale (unless sold with business) | Intangible assets regime |
| Customer lists | CGT | Intangible assets regime |
Valuing Goodwill
There is no single prescribed method for valuing goodwill. HMRC expects valuations to be reasonable and supportable. Common approaches include:
- Excess earnings method: Calculate the earnings of the business above a normal return on tangible assets; capitalise the excess
- Multiple of super-profits: Apply a multiplier (typically 1–5 times) to the average super-profits
- Revenue-based: A percentage of annual turnover (common in professional practices, medical practices, and accountancy firms)
- Market comparison: What similar businesses have been sold for in arm’s length transactions
Tip: When transferring goodwill on incorporation, the value should be supported by a formal valuation. HMRC’s Shares and Assets Valuation team can review valuations, and an inflated goodwill figure risks an HMRC enquiry. It is often worth obtaining a professional valuation.
Frequently Asked Questions
What is the base cost of self-generated goodwill?
Nil. Goodwill that you have built up yourself (rather than purchased) has no acquisition cost for CGT purposes. The entire disposal proceeds are therefore a chargeable gain. BADR may be available to reduce the rate to 10%.
Can a company amortise goodwill for tax purposes?
It depends. If the goodwill was acquired from an unrelated party, or was created before 1 April 2002 and acquired from a related party before 3 December 2014, it can be amortised under the intangible assets regime. Goodwill acquired from a related party (5%+ shareholder) after 3 December 2014 cannot be amortised.
What counts as a “related party” for the goodwill restriction?
A person is related to the company if they hold 5% or more of the ordinary share capital (or are connected with someone who does). This catches most incorporations where the sole trader transfers goodwill to their own company.
Does purchased goodwill qualify for capital allowances?
Not directly. Goodwill is not plant and machinery, so it does not qualify for capital allowances. For companies, it falls within the intangible assets regime. For individuals, the base cost of purchased goodwill is deductible when the goodwill is subsequently sold.
Further Reading
- Selling a Sole Trader Business — how each asset is taxed on a business sale
- Incorporation Relief — deferring CGT on goodwill when incorporating
- Incorporating a Business: CGT — practical guide to the incorporation process
- Business Asset Disposal Relief — the 10% rate on qualifying business disposals
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