As announced in the Autumn Statement, ER no longer applies in respect of disposals of goodwill to a ‘related’ company on or after 3 December 2014. However, the draft legislation revealed that the changes will have a wider impact than originally anticipated.
Today’s Budget announces a change to the draft legislation to deal with one of the unintended consequences of the legislation. Changes will be made to ensure that where a partnership disposes of goodwill to a company ‘related’ to some of the partners, those partners which do not receive a stake in the company will still be able to claim entrepreneurs’ relief in respect of their share of the goodwill.
The test used in the draft legislation to determine whether the company acquiring the goodwill is ‘related’ is still very wide. The legislation applies where the company is a close company and the transferor is a participator in the company or associated with a participator in the company. This could catch situations where a sole trader sells his business, including the goodwill, to an unrelated company and some or all or the consideration he receives is shares in the acquiring company (such that he or she will be treated as a participator in the acquiring company).
Additional changes were also announced restricting the application of entrepreneurs’ relief to management company structures and associated disposals, along with a potential expansion of its availability to spin-out companies.