Changes to Goodwill Tax Relief

12/Sep/2019

Since July 2015 corporation tax relief on amortisation of goodwill purchased by companies has been unavailable following changes announced as part of that year’s Summer Budget.  

However as part of revisions under the 2019 Finance Act aimed at making the UK more competitive in terms of its treatment of intangibles, the government has to some extent reversed this position and reintroduced a targeted tax relief for goodwill.  

As a result of these changes companies that acquire goodwill on or after 1 April 2019 will now receive relief for goodwill up to six times the value of any Intellectual Property (IP) assets in the business being acquired – such assets include patents, registered designs and design rights and plant breeders’ rights.

The key difference however between the old regime (in which the tax relief followed the amortisation charged to the company accounts) and the new one is that relief will be available at a fixed rate of 6.5% per annum in all cases.

Whilst this is clearly good news for companies acquiring businesses with IP assets, the previous restrictions remain in place where this is not the case, where goodwill was acquired prior to 1 April 2019 or where goodwill is internally generated as a result of incorporation by a related party.

Worked example:

Company A acquires Company B with goodwill valued at £500,000 and patents valued at £50,000.

Company A can claim tax relief capped at 6 times the value of the qualifying IP - in this case £300,000.

Therefore the annual allowable amortisation for tax relief purposes (which is likely to differ to the amortisation charged in the accounts dependent on the policy) will be £19,500 (being £300,000 x 6.5%) per annum over a period of just over 15 years.