Goodwill in trade related properties

Introduction

Further to the decision in the Balloon Promotions case SpC524 (see Tax Bulletin 83) we have met with disagreements in relation to how sums paid in transactions involving businesses carried out from 'trade related properties' (eg public houses, hotels, petrol filling stations, cinemas, restaurants, care homes etc) should be allocated between what have previously been labeled as different categories of 'goodwill' (eg free, adherent and inherent). The main areas of disagreement relate to Capital Gains Tax and Stamp Duty Land Tax (SDLT) where we accept that the term 'goodwill' must be construed in accordance with the principles established by legal authorities. The current situation is that there is a backlog of unresolved interventions.

Revised approach by HM Revenue & Customs (HMRC) for Capital Gains Tax and SDLT

The differing views held in this area prompted a review of our approach to the identification and valuation of goodwill in 'trade related properties'. In the past we have taken the view that it was unlikely that there would be 'free goodwill' of any significant value in businesses carried out from such properties.

We have now concluded that:

  • The subdivision of goodwill into different categories such as 'inherent goodwill','adherent goodwill' and 'free goodwill' is not helpful as this tends to cause confusion. What used to be called 'inherent' and 'adherent' goodwill are, in reality, attributes that add value to the property in which a business is carried out and they do not represent goodwill at all. To make this distinction clear in our communications we will now only use the term 'goodwill' and when referring to attributes of the value of a property we will describe these as such.
  • If a business carried out from a trade related property is sold as a going concern then the sale price is likely to include some goodwill but the sum attributable to goodwill will depend on the facts of each case.
  • For Capital Gains Tax and SDLT purposes the value of goodwill and any other separately identifiable intangible assets will usually be represented by the difference between the value of the business as a going concern and the value of the tangible assets (the property, fixtures, fittings, chattels etc).

We have prepared a background note that explains the issues in more detail and a practice note that sets out how we and the Valuation Office Agency (VOA) consider one should go about allocating the price paid for a business as a going concern between goodwill and other assets included in the sale.

HMRC approach for Schedule 29 Finance Act 2002

For Schedule 29 FA 2002 the accountancy definition of goodwill rather than that drawn from interpreting legal authorities is applicable. Our approach in this area is outlined in the Corporate Intangibles Research and Development Manual (CIRD25030). We are seeing some transactions where the appropriate accounting based approach has not been adopted and are making the necessary interventions.

Roll-out to address the backlog of Capital Gains Tax and SDLT interventions

We appreciate that there has been a delay in making progress in these interventions whilst we carried out the review mentioned above. However, we believe that this update provides the necessary clarity on the HMRC position and we now intend to start addressing the backlog by contacting the agents involved. We will be referring to the views outlined in the update to inform our view on how best to make progress on a case by case basis.

Goodwill in trade related properties - background note

Goodwill in trade related properties - practice note (PDF 62K)