How does goodwill get taxed on incorporation of a business?
Answered 17 March 2026
Taxation of Goodwill on Incorporation of a Business
The taxation of goodwill on incorporation involves two distinct tax charges: Capital Gains Tax (CGT) on the transferor (the individual/partnership disposing of the goodwill) and Corporation Tax (CT) relief restrictions on the company receiving it.
What the Law Says
1. CGT on the Transferor – Deemed Market Value Disposal
When a sole trader or partner incorporates and retains control of the company, the disposal of goodwill is treated as a transfer between connected persons under TCGA 1992 s.286(6). As a result, the goodwill is deemed to have been disposed of at market value, regardless of the actual consideration received, by virtue of TCGA 1992 ss.17 and 18.
2. Incorporation Relief (Roll-Over) – TCGA 1992 s.162
Where a person transfers a business as a going concern, together with the whole of its assets (or all assets other than cash), to a company wholly or partly in exchange for shares, the CGT charge on the gains (including on goodwill) can be deferred by rolling the gains over against the base cost of the shares received. This relief is automatic — no claim is required — though the transferor may elect under TCGA 1992 s.162A to disapply it.
The amount rolled over is the fraction A/B of the total gain, where A = cost of new shares and B = total consideration received. If the business is transferred entirely for shares, full roll-over is available.
3. Business Asset Disposal Relief (BADR) – Excluded for Incorporations (post-3 December 2014)
For disposals on or after 3 December 2014, gains on goodwill disposed of to a close company are no longer eligible for BADR where the transferor (alone or with connected persons) holds 5% or more of the ordinary share capital or voting rights of the acquiring company. This effectively means BADR is unavailable where a sole trader or partnership incorporates.
4. Corporation Tax Relief on Goodwill in the Company – CTA 2009 Part 8
The company may recognise purchased goodwill on its balance sheet. Whether it can claim CT deductions (amortisation or fixed-rate debits) depends on when the incorporation occurred:
- Before 3 December 2014: Relief was available under CTA 2009 Part 8 for goodwill acquired on or after 1 April 2002 from a non-related party, or (in limited cases) from a related party where the goodwill was created on or after 1 April 2002.
- 3 December 2014 – 7 July 2015: FA15 s.26 (CTA09/S849B) introduced restrictions on relief for goodwill acquired from a related party on incorporation.
- 8 July 2015 – 31 March 2019: No relief was available for goodwill acquired or created in this period.
- On or after 1 April 2019: FA19 s.25 (CTA09/S879K) introduced a fixed rate of 6.5% per annum relief, but only where the goodwill is acquired together with qualifying intellectual property (IP) as part of a business acquisition. Relief is further capped at 6 times the cost of qualifying IP. A restriction similar to CTA09/S849B continues to apply to related party incorporations.
HMRC Guidance / Practice
CGT – Establishing Whether Goodwill Has Been Transferred
HMRC will not accept that goodwill has been disposed of unless there is factual evidence of a transfer of the business as a going concern (as opposed to a mere transfer of individual assets). HMRC will refer the matter to the Shares and Assets Valuation (SAV) team for a market value determination only once succession to the business has been established.
Why the CT Relief Restrictions Were Introduced
HMRC guidance explains that prior to 3 December 2014, incorporating businesses could obtain CT deductions by amortising goodwill even where there was little or no economic change in ownership (e.g. the same individuals continued to run the business through their company). This was seen as an unfair tax advantage over businesses that never incorporated, since internally-generated goodwill cannot be recognised for tax purposes by a continuing unincorporated business. FA15 s.26 was introduced to remove this advantage.
Third-Party Goodwill – Apportionment
Where the goodwill transferred on incorporation includes elements previously acquired from a third party (i.e. not purely internally generated), the FA15/FA19 restrictions are apportioned so that only the internally-generated element is restricted. The third-party acquired element may still qualify for relief.
Partnership Incorporations – Related Party Rules
Where a partnership incorporates into a close company and one of the partners is a participator (or associate of a participator) in that company, the transfer is likely to be between related parties under CTA09/S835. HMRC warns against the common misconception that goodwill can be apportioned between partners to avoid the related party rules.
Summary Table
| Period of Incorporation | CGT on Transferor | CT Relief in Company |
|---|---|---|
| Before 3 Dec 2014 | Market value disposal; s.162 roll-over available; BADR potentially available | Amortisation relief available (if post-Apr 2002 goodwill) |
| 3 Dec 2014 – 7 Jul 2015 | Market value disposal; s.162 roll-over available; BADR not available | Restricted relief (FA15/S849B) |
| 8 Jul 2015 – 31 Mar 2019 | Market value disposal; s.162 roll-over available; BADR not available | No relief |
| On/after 1 Apr 2019 | Market value disposal; s.162 roll-over available; BADR not available | 6.5% fixed rate only if acquired with qualifying IP; restricted for related party incorporations |
Citation sources
The Government announced in the 2017 Budget that it would consult on reforming the intangible fixed asset regime and in the 2018 Budget that it was introducing a targeted relief for relevant assets from April 2019. The FA19 policy focuses on relevant assets acquired on the acquisition of a business with qualifying intellectual property (IP). The main policy design elements for allowing debit relief in respect of goodwill and relevant assets are: Relief for the cost of post-FA 2019 relevant asset
Issue 6. The Appellant accepts that the various assessments and closure notices are valid. 7. The issue in this appeal turns on whether the goodwill of the business transferred to the Appellant in 2013 was an asset created on or after 1 April 2002 so as to fall within the intangible fixed assets code in part 8 of Corporation Tax Act 2009 (“CTA 2009”). 8. Section 882 CTA 2009 sets out the scope of the intangible fixed asset regime as follows (so as far as is relevant): “(1) The general rule is th
BAI receive a number of requests for technical advice in relation to the application of the related party rules at CTA09/PART8/S835 on the incorporation of a pre-FA 2002 partnership business. Rules were introduced by FA15 which applied from 3 December 2014 to 7 July 2015, and FA19 which apply from 1 April 2019, that restrict when and how relief is given for goodwill recognised on incorporation of a business (see CIRD44001 onwards). No relief was available for goodwill acquired between 8 July 201
Part V Transfer of business assets , business asset disposal relief and investors' relief Chapter I Transfer of business assets: General provisions Transfer of business to a company Roll-over relief on transfer of business. 162 1 This section shall apply for the purposes of this Act where a person who is not a company transfers to a company a business as a going concern, together with the whole assets of the business, or together with the whole of those assets other than cash, and the business i
Rules introduced in FA15/S26 (CTA09/S849B) and in FA19/S25 (CTA09/S879K) apply where an individual or a firm incorporates their business between 3 December 2014 and 7 July 2015 or, on or after 1 April 2019. These rules restrict when and how relief for goodwill and certain customer related intangible assets is given. See CIRD44000 onwards.
‘Incorporation’ is the term that is often used to describe the transfer of a business from an individual, or partnership, to a company where the individual(s) retains an interest in the company. Because there is a transfer of the business from one legal entity to another, e.g. from an individual to the individual’s company, the company may recognise purchased goodwill and other relevant intangible assets on the acquisition of the business. Purchased goodwill is normally recognised when considera
The FA15 rules are only intended to restrict relief for internally-generated goodwill acquired from a related party (for example; on incorporation). Where the assets acquired on incorporation also include goodwill type assets that were previously acquired from a third party the amount of relief is apportioned. This is to ensure that the restriction only applies to the internally-generated assets acquired on incorporation. For further details of how the rules work see: CIRD44400 for cases where t
The incorporation of a business of a sole trader or a partnership is a common occurrence. If on the incorporation of a business the transferor has control of the company, the disposal of goodwill will be a transfer between connected persons within TCGA92/S286(6). Where the transfer is between connected persons, any goodwill transferred to the company will be deemed to have been disposed of for a consideration equal to its market value in accordance with TCGA92/S17 and TCGA92/S18. If you are deal
For disposals on or after 3 December 2014, gains on disposals of the goodwill of a business will no longer be relevant business assets and therefore will no longer qualify for the relief if the disposal is made to a close company. The rule only applies if immediately after the disposal, the person (either by themselves or with a “relevant connected person”) own 5% of the Ordinary Share Capital or have 5% of the voting rights of the purchasing company (or any company which is in a group in which