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HMRC internal manual

Capital Gains Manual

Goodwill: a single asset: branches, mergers and demergers

For CG purposes the goodwill of a business whilst composed of a variety of elements, see CG68010, is a single asset rather than a number of separate assets. This applies even where the business consists of several different trading activities or is carried on from a number of branches or outlets. In such cases each of the activities, branches or outlets will contribute to the overall “global” goodwill of the business.

Three common situations where a disposal or acquisition of something less than the whole of a business may occur are branches, mergers and splits.

 
 
 
 

Branches

When a business conducts its affairs from a number of branches, each branch contributes to the overall worth of the business and hence to the value of its global goodwill. Those contributions can be positive, for example where a branch is trading profitably or negative, for example where it is trading at a loss.

As goodwill is treated as a single asset for CG purposes we do not accept that each branch has its own separate goodwill.

Consequently, if a business with three branches (Bristol, Manchester and Leeds) disposes of one of its branches (Manchester) as a going concern it will have made a part-disposal of its global goodwill. In such circumstances it will be necessary to apply the part disposal rules in TCGA92/S42. How these operate in practice is discussed in CG68050.

Mergers

Mergers commonly occur in professional partnerships, for example where two existing firms of accountants decide to amalgamate. The goodwill of professional partnerships is likely to be closely associated with the client base and such firms normally measure goodwill by their fee income. In determining what has happened to each firm’s goodwill you will need to establish what has happened to the client base.

Where each of the merging firms has transferred all or most of its client base into the merged entity, each will have introduced its own goodwill into the merged partnership. At the time of the merger there will have been an exchange of goodwill between the partners in each of the merged firms and the capital gains consequences will follow the guidance set out at CG27700+.

It is important to remember that many professional firms do not reflect goodwill in their balance sheets but this does not mean that it does not exist. The only circumstance in which the goodwill of one of the merged firms may cease to exist at the time of a merger would be in the exceptional situation where none of its client base was transferred into the merged firm. In such circumstances a claim under TCGA92/S24 (1), see CG68070, that the goodwill of the firm has been “lost or destroyed” may be appropriate depending on the precise facts of the case.

Demergers

This is the situation where an existing firm splits into two or more parts and is common in professional partnerships so that, as for mergers, you will need to establish what has happened to the client base.

In this type of situation the goodwill of the original firm will have been split between the new firms if each of those new firms continues to act for clients of the original firm. For example:

A partnership comprising A, B, C and D demerges with A and B forming a new partnership taking with them 50% of the client base and C and D forming another with the remainder. Partnership profits are shared equally in each of the old and new partnerships.

Both A and B have disposed of one half of their 25% interests in the goodwill of the original partnership and each has acquired one half of the interests disposed of by each of C and D.

Both C and D have disposed of one half of their 25% interests in the goodwill of the original partnership and each has acquired one half of the interests disposed of by each of A and B.