What is goodwill in a business acquisition?
Answered 17 March 2026
Here is a comprehensive answer based on the available sources.
What is Goodwill in a Business Acquisition?
What the law says
The Corporation Tax Act 2009 (CTA 2009) treats goodwill as an intangible fixed asset within Part 8 of that Act. Section 715 of CTA 2009 (as amended) confirms that goodwill includes internally-generated goodwill and that "goodwill is treated as created in the course of carrying on the business in question".
For accounting and tax purposes, goodwill is not separately defined in the capital gains legislation (TCGA 1992), but it is recognised as an asset under TCGA 1992 s.21(1).
HMRC guidance / practice
1. The classic legal definition
The leading legal authority on goodwill comes from IRC v Muller & Co Margarine Limited [1901] AC 217, cited in HMRC's Capital Gains manual. Lord Macnaghten stated:
"It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start."
Lord Lindley added that goodwill "include[s] whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and agreed absence from competition."
2. Goodwill as a residual value in an acquisition
In the context of a business acquisition, goodwill is the residual surplus value of the business. Under FRS 102 s.19, the amount of purchased goodwill to be capitalised is:
"the difference between the cost of the business acquisition and the aggregate fair value of the identifiable assets and liabilities acquired. In effect, goodwill is the residue of the surplus value of the business after identifying specific assets and liabilities to which a fair value can be attributed."
Importantly, only purchased goodwill (arising on acquisition of a business) can be capitalised — internally generated goodwill cannot.
3. Factors contributing to goodwill
HMRC guidance identifies the following factors that can contribute to the existence of goodwill in a business:
- relationships with customers and suppliers
- the reputation of the company and its products
- the location of the business
- the expertise of the workforce and management
- the market share obtained
4. Distinction between personal and business goodwill
HMRC also draws a distinction between personal goodwill (attached to the proprietor's individual skill and reputation) and business goodwill (attached to the business itself). Where a business could not continue without the proprietor, the goodwill is likely to be personal.
5. Distinction between CG and CTA 2009 treatment
For capital gains purposes, goodwill is construed using legal principles (as above). For corporation tax purposes under Part 8 CTA 2009, accountancy principles apply, and goodwill is simply "the difference between the overall worth of a business when it changes hands and the value of its identifiable (including intangible) assets".
Citation sources
Goodwill is an asset within the meaning of TCGA92/S21(1). This guidance explains the nature of goodwill and its treatment for CG purposes. Halsbury’s Laws of England, 4th edition, Vol. 35 at page 1206 states that: The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of
Goodwill is a term used by different people to mean different things. In the context of selling a business it is sometimes defined as the difference between the value of a business as a whole and the value of its assets as individual items. The following factors can contribute to the existence of goodwill: a. the relationships with customers and suppliers; b. the reputation of the company and its product; c. the location of the business; d. the expertise of the workforce and management; e. the m
For CG purposes goodwill should be construed with legal rather than accountancy principles. A distinction must be made between goodwill for CG purposes and goodwill within Part 8 CTA 2009 where accountancy principles apply, and goodwill is simply the difference between the overall worth of a business when it changes hands and the value of its identifiable (including intangible) assets. The goodwill of a business is the attractive force which brings in custom, it is the thing that distinguishes a
Under FRS102 s19, goodwill should only be capitalised when it is purchased as part of the acquisition of a business. Internally generated goodwill should not be capitalised. The amount of purchased goodwill to be capitalised is calculated as the difference between the cost of the business acquisition and the aggregate fair value of the identifiable assets and liabilities acquired. In effect, goodwill is the residue of the surplus value of the business after identifying specific assets and liabil