When a sole trader transfers a going business to a new company, goodwill passes with it. The company records the goodwill at cost, being the agreed price less the fair value of the other assets and liabilities taken over, and amortises it. Any price not paid in shares or cash is credited to the director’s loan account, which the director can later draw without further tax. The value must be defensible at market value, because HMRC treats the transfer as one between connected persons.

Why does goodwill appear when a business incorporates?

HMRC’s Capital Gains Manual at CG68050 explains that goodwill is inseparable from the business that generates it, so when a business is transferred as a going concern, the goodwill goes with it even if it has never appeared on a balance sheet. A sole trader who has built up a client base has goodwill that was never bought, so it is not in their own accounts. On incorporation it is sold to the company, and for the first time it has a price.

CG68050 also says that where the transferor controls the company, the two are connected persons, and the goodwill is treated as disposed of at its market value under sections 17 and 18 of the Taxation of Chargeable Gains Act 1992, whatever price is written into the agreement. HMRC officers are told not to accept that goodwill has been disposed of at all unless there is factual evidence that the company succeeded to the business as a going concern.

How is the goodwill valued?

The legal test for tax is market value: what an unconnected buyer would pay for the business, less the value of its separate assets. In practice that usually means a valuation based on the maintainable profits of the trade after a realistic reward for the owner’s own work, because a buyer would not pay for profit that walks out of the door with the founder.

HMRC’s Shares and Assets Valuation team says it will not give a valuation of intangible assets such as goodwill on request. The valuation is therefore the taxpayer’s own, and it should be written down with its workings and kept with the incorporation papers. Common weak points are valuing a one person consultancy as though its income were transferable, and using an industry rule of thumb with no reference to the business’s own results.

How does the company record the purchase in its accounts?

Buying the trade and assets of a sole trader is a business combination. FRS 102 paragraph 19.4 says a combination may involve the purchase of net assets that together form a business, and paragraph 19.6 requires the purchase method unless the deal is a group reconstruction. The glossary definition of a group reconstruction covers transfers involving group entities and their shareholders, so a transfer by an individual trader does not qualify for merger accounting.

Under the purchase method:

  1. The cost of the combination is the fair value of what the company gives, including shares issued and any amount it owes the seller, plus directly attributable costs (paragraph 19.11).
  2. The identifiable assets and liabilities taken over, such as equipment, stock and debtors, are measured at fair value (paragraph 19.14).
  3. Goodwill is the excess of cost over that net figure, recognised as an asset (paragraph 19.22).
  4. Goodwill is then carried at cost less amortisation and impairment, over its useful life, which cannot exceed 10 years if it cannot be estimated reliably (paragraph 19.23). See goodwill: useful life and amortisation.

A micro entity applies FRS 105 paragraph 14.1, which uses the FRS 102 Section 19 method with simplifications: it does not separately recognise intangible assets such as customer lists, so they stay within goodwill, and it does not recognise deferred tax. Paragraph 14.2 then applies the same amortisation rule and the same 10 year cap. The general mechanics of acquisition accounting are in FRS 102 Section 19.

What does a typical set of entries look like?

Illustration only. A self employed surveyor incorporates. The agreed values are equipment £20,000, stock and work in progress £5,000 and goodwill £75,000, a total of £100,000. The company issues 100 ordinary £1 shares and owes the rest to the founder.

Account Debit Credit
Goodwill £75,000
Equipment £20,000
Stock and work in progress £5,000
Share capital £100
Director’s loan account £99,900

If the directors judge the goodwill’s useful life to be five years, the company charges £15,000 a year of amortisation in its profit and loss account. The director’s loan account shows that the company owes the founder £99,900.

What does the credit on the director’s loan account mean?

The credit is a debt the company owes its director for the business it bought. GOV.UK guidance on directors’ loans treats money a director has previously paid into or lent to the company as outside what it calls a director’s loan, so as the company has cash, the founder can draw down the balance as repayment of that debt rather than as salary or dividends. The trap is drawing more than the balance, which turns the account overdrawn; see director’s loan account explained. How an interest free balance owed to a director is measured in the accounts is covered in directors’ loans under FRS 102.

Company law also applies. Section 190 of the Companies Act 2006 requires a resolution of the members before a company acquires a substantial non cash asset from a director. Under section 191 an asset is substantial if it exceeds £100,000, or exceeds 10% of the company’s asset value and is more than £5,000. For a new company with no statutory accounts, asset value is its called up share capital (section 191(3)(b)), so almost every incorporation that includes goodwill needs that approval.

Does the company get corporation tax relief for the amortisation?

Usually not. HMRC’s Corporate Intangibles Research and Development Manual at CIRD44083 explains that section 879K of the Corporation Tax Act 2009 fully restricts relief where, on or after 1 April 2019, a company acquires goodwill from an individual or firm who is a related party, unless the third party acquisition condition is met. That exception is for goodwill the trader had itself bought from an unconnected party. HMRC expects the restriction to apply to most related party incorporations.

CIRD44070 explains the effect: no deduction for amortisation or impairment as it is charged, and relief only when the goodwill is later realised, with any loss treated as a non trading debit. The £15,000 annual charge in the illustration is therefore added back in the company’s tax computation. For goodwill acquired between 8 July 2015 and 31 March 2019, CIRD44055 confirms that no amortisation relief was available at all.

What is the tax position for the sole trader?

The disposal of goodwill is a capital gain, usually with a base cost of nil because the goodwill was built up rather than bought. Two reliefs need care:

  • Incorporation relief. Section 162 of the Taxation of Chargeable Gains Act 1992 defers gains where the whole business and all its assets (or all except cash) are transferred wholly or partly for shares. Only the fraction of consideration taken in shares qualifies, so in the illustration, where £99,900 of £100,000 is left on loan account, almost nothing is deferred. The claim must be made by the first anniversary of 31 January following the tax year of transfer. See incorporation relief.
  • Business Asset Disposal Relief. Section 169LA of the same Act says goodwill transferred to a close company in which the seller meets the personal company conditions is not a relevant business asset, so the relief does not apply to it, subject to a narrow exception where the shares are sold on to another company within a short period. See Business Asset Disposal Relief.

What if the goodwill is overvalued?

An inflated value gives the founder a larger loan account to draw tax free, which is exactly why HMRC looks at it. The Employment Income Manual at EIM21660 says that where a director transfers an asset to their company for more than it is worth, HMRC should normally contend that the excess over market value is earnings under section 62 of the Income Tax (Earnings and Pensions) Act 2003, or failing that a taxable benefit under section 203. In the accounts, goodwill recorded above its real value is also likely to need an impairment write down once trading results fail to support it.

The most frequent mistakes are no written valuation, no member approval under section 190, claiming corporation tax relief on the amortisation, and assuming Business Asset Disposal Relief covers the goodwill gain.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.