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Where Taxpayers and Advisers Meet

Buying a business

John Barry
Posts:7
Joined:Wed Aug 06, 2008 3:04 pm

Postby John Barry » Mon Sep 22, 2003 8:47 am

I have recently purchased a list of customers and suppliers from my parents following their retirement so that I can takeover and hopefully build.

I have agreed to pay them £5,000 for the information and the use of their expertise. This roughly equates to 6 months profit.

Am I able to offset this against my trading profits and are my parents able to treat the £5,000 as a capital gain to offset against their annual exemption?

Or is there perhaps a different way of structuring this to ensure it is tax efficient for both myself and my parents. (My parents have other taxable income and are basic rate tax payers)

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Tue Sep 23, 2003 12:00 am

John

If your parents sell their business to you, this will be treated as a transfer made at open market value for Capital Gains Tax (CGT) purposes as you are connected persons. Therefore the consideration paid is not relevant.

The disposal would be a chargeable event for CGT and they would be taxed accordingly. However, they would be entitled to deduct various reliefs in computing the gain uncluding unused annual exemptions (£7,900 each per annum) and business asset taper relief (probably eliminating 75% of any net gain). If the transfer was made prior to the end of the previous tax year (5 April 2003) they may also be entitled to some residual retirement relief. If there is still an unsheltered gain, it would be possible to hold this over by jointly making a Section 165 (Business Asset Gift Relief) hold-over election by 31 January 5 years after the end of the tax year in which the gift was made.

There is some tax relief for the purchase of goodwill if you structured the sale in an appropriate manner. It could be more tax efficient for your parents to gift the asset to you and to draw a modest salary (depending on the profit profile.

You will appreciate that the transfer of a business if complex from a tax perspective, and professional advice should always be sought.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk


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