Kitz Ltd Sept Dec 19 (BPP FA 2020 Question 36)

Hi Tutor,

Regarding to the question below
– Kitz Ltd will sell a patent to on 3 May 2020 for £72,000.
– Feld Ltd will use the loan to purchase goodwill and office premises for use in its business, and 70% of the ordinary share capital of Durn Ltd.
– Feld Ltd will acquire an intangible fixed asset (goodwill of an unincorporated business) on 1 April 2020, which is within the 12 months prior to the sale of the patent by Kitz Ltd.
– Kitz Ltd owns 100% of Feld Ltd so they are in a capital gain group.

Why is that goodwill is counted as a qualifying business asset eligible for rollover relief? Isn’t that goodwill is only eligible when individual utilizes the rollover relief? Thanks.

Questions

Kitz Ltd
– loan to Feld Ltd:
– Kitz Ltd will make a loan of £450,000 to Feld Ltd on 1 April 2020.
– Feld Ltd will use the loan to purchase goodwill and office premises for use in its business, and 70% of the ordinary share capital of Durn Ltd.
– The cost of these acquisitions is as follows:
• £ Goodwill 68,000
• Office premises 137,000
• 70% shareholding in Durn Ltd 245,000

Kitz Ltd – proposed sale of a patent:
– Kitz Ltd will sell a patent to Durn Ltd on 3 May 2020 for £72,000.
– Kitz Ltd purchased the patent for £60,000 on 3 May 2015.
– The tax written down value of the patent on 3 May 2020 will be £30,000.
– Kitz Ltd has always used the patent in its business.

Answer

(ii) Impact on Kitz Ltd’s corporation tax liability for the year ending 31 March 2021 if the maximum rollover relief claim is made As Feld Ltd is a UK resident, wholly owned subsidiary of Kitz Ltd, the two companies are in a capital gains group.

Feld Ltd will acquire an intangible fixed asset (goodwill of an unincorporated business) on 1 April 2020, which is within the 12 months prior to the sale of the patent by Kitz Ltd.

Accordingly, rollover relief will be available for part of the profit on the sale of the patent to be deferred against the cost of the goodwill. As the cost of the goodwill is less than the sale proceeds for the patent, the maximum profit which can be deferred is restricted to the excess of the amount invested in the goodwill over the original cost of the patent. Therefore the maximum profit which can be deferred is £8,000 (£68,000 – £60,000). This would lead to a reduction in Kitz Ltd’s corporation tax liability of £1,520 (£8,000 x 19%)