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If you are buying or selling a house, you usually set a price for the whole thing. You don't say, '£10,000 for the living room, £3,000 for the cupboard under the stairs, £4,000 for the landing...' and then add it up. In fact, if you try to do this, you will probably be shocked at the cost of the cupboard under the stairs and you will resolve to use it more often!
If you are buying or selling a business, it makes more sense to look at the balance sheet and add it up, but the overall price is still usually a figure based on other things - the expectation of profit, the goodwill, intangible rights. For commercial purposes, if you are willing to pay £1m for 'the whole shooting match', then allocating that £1m to the individual assets is a bit like pricing the rooms in a house.
But you have to do it - it's necessary for preparing the accounts, and it's crucial for tax. The vendor of a business has to calculate tax charges on the sale of all the individual assets, and they are taxed in different ways - some are charged as income, some create
capital gains, and these are usually taxed at different rates. The distinction will also be important for the purchaser, who can claim different reliefs for spending money on different types of asset - and no relief at all for some types of spending.
This was highlighted recently by a case about the sale of a fishing trawler, which is a fairly simple 'business' - there is the physical asset, and there is the right to catch fish (its quota allocation). A shipping agent negotiated the sale, and split the overall price of £1.3m between the two assets. Afterwards, the owners realised that they would have been better off if the whole £1.3m had been put against the ship - but they were stuck with what their agent had agreed with the purchaser.
If you are buying or selling a business, splitting up the price between the different assets may be a commercial irrelevance - but it's worth knowing what the tax consequences are before you sign on the line. We can advise you.
The case was heard by the Special Commissioners and carries the reference Fullarton and others v IRC SpC 00403. The owners argued that the sale was just of the ship, and £1.3m should be allocated to that - the agent had treated £400,000 as being for the intangible assets.
In many cases, what the agent had done would have been better - the intangibles would give rise to a capital gain, which would be taxed at rates lower than those which would apply to the balancing charge on the ship. However, in this case there were unrelieved trading losses brought forward. Presumably a large balancing charge would not have been taxed at all, while a capital gain would have carried at least some liability (because the brought forward losses could not be set against it). |
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