The meaning of 'goodwill' for CGT purposes (06-11-2019)
Source: HM Revenue & Customs | 06-11-2019
The meaning of goodwill for CGT purposes is complex. The term 'goodwill' is rarely mentioned in legislation and there is no definition of 'goodwill' for the purposes of Capital Gains legislation.
In fact, most definitions of goodwill are derived from case law. At its simplest you could describe goodwill as the 'extra' value of a business over and above its tangible assets.
In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.
HMRC’s internal manual states that:
'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'