Goodwill in Trade Related Properties Background Note
In the past HM Revenue & Customs (HMRC) have taken the view that it was unlikely that there would be ‘free goodwill’ of any significant value in businesses carried out from trade related properties (for example public houses, hotels, petrol filling stations, cinemas, restaurants, care homes etc) because the occupation and use of the particular, specially adapted, premises was usually essential and integral to the generation of the business income.
However, it is now acknowledged that when a business is sold as a going concern the sale price will reflect the combined value of the tangible assets together with the benefit of other business assets such as any contracts with customers, staff and suppliers, records of previous customers etc. Substantial value can be realised by combining the tangible and other business assets together for sale as a going concern but this enhanced value may be reduced if the assets are split and sold separately.
In the unusual event of this type of business being transferred without some form of property interest, it would be highly likely that the value otherwise achieved, would be substantially diminished or removed. This is why such businesses are rarely, if ever, transferred without any form of property rights.
It remains important to recognise this distinction from most other businesses where there is no such reliance on a specific property interest and business goodwill can be readily sold and will be of value irrespective of the actual premises. Recently published articles in the professional press do not fully address this important distinction and appear to misinterpret some fundamental valuation issues.
There are a host of real and practical reasons why the assets in such premises cannot be actually separated without depreciating their combined value but HMRC now accept that for taxation purposes HMRC need to recognise the contribution that each asset makes to the combined value.
The attached Practice Note explains the issues in more detail and sets out how HMRC and the Valuation Office Agency (VOA) consider one should go about apportioning the price paid for a business as a going concern between goodwill and other assets included in the sale. The Practice Note reflects the VOA view that the appropriate method of valuing this type of property is by reference to the profit making potential of the premises. The VOA are currently discussing this valuation approach with the Royal Institution of Chartered Surveyors.
