Goodwill Amortisation: Why It's Not Tax Deductible in the UK

What Is Goodwill and Why Does It Appear on Your Balance Sheet?

Goodwill arises when a business is acquired for more than the fair value of its identifiable net assets. For example, if your limited company buys a trade and assets worth £100,000 but pays £150,000 for them, the £50,000 difference is goodwill. It reflects things like customer relationships, brand reputation, and established trading history — real value, but nothing you can physically touch.

Under UK accounting standards (FRS 102), goodwill must be amortised over its useful economic life — typically up to 10 years if that life cannot be reliably estimated. This amortisation appears as an expense in your profit and loss account, reducing your accounting profit. The problem? HMRC doesn't always see it the same way.

Why Goodwill Amortisation Is Usually Not Tax Deductible

The tax treatment of goodwill has changed significantly over the years, and the rules are now quite restrictive. Under the intangible fixed assets regime in the Corporation Tax Act 2009, a company can only claim a tax deduction for the amortisation of goodwill in limited circumstances.

Following changes introduced in the Finance Act 2015 and further refined in 2019, the key rules are:

• Goodwill acquired on or after 8 July 2015 from an unrelated party: No tax deduction is available for amortisation or impairment. The relief is effectively blocked.
• Goodwill acquired before 8 July 2015: Tax relief may still be available under the old rules, but this applies to an increasingly small pool of assets.
• Goodwill acquired from a related party (e.g. an individual incorporating their sole trade): Relief has been blocked since April 2015, meaning a sole trader who incorporates and transfers goodwill into their new company cannot claim amortisation as a deduction against corporation tax.
• Goodwill acquired on or after 1 April 2019 from an unrelated third party alongside qualifying IP: A partial relief of 6.5% per year was reintroduced in limited circumstances, but this is narrowly defined and often does not apply.

The practical result is that for most modern acquisitions, your company's accounts will show an amortisation charge each year, but you will need to add it back in your corporation tax computation. Your taxable profit will be higher than your accounting profit.

The Incorporation Trap Directors Must Avoid

One of the most common mistakes we see is a sole trader incorporating their business, attributing significant goodwill to the new limited company, and expecting to amortise it for tax relief. This does not work. HMRC specifically blocked relief for goodwill transferred from a related individual as part of an incorporation. Not only do you lose the tax deduction, but you may also face a capital gains tax charge at the individual level on the transfer itself if not structured carefully.

How to Plan Around the Restriction

While the rules are restrictive, there are legitimate ways to manage the impact:

• Focus on separately identifiable intangibles: Assets like customer lists, software, patents, and trademarks that can be valued independently of goodwill may qualify for full intangible asset relief. Structure acquisitions to clearly identify and value these separately.
• Negotiate the purchase price allocation carefully: When buying a business, work with your accountant before completion to allocate as much of the purchase price as possible to qualifying assets rather than goodwill.
• Consider the timing of disposals: When goodwill is eventually sold, a taxable credit arises. Ensure your overall tax position is optimised around that event.
• Review pre-2015 goodwill: If your company holds goodwill acquired before 8 July 2015, confirm whether relief is still available and ensure it is being claimed correctly.

The Bottom Line

Goodwill amortisation is a genuine accounting cost, but in most cases it will not reduce your corporation tax bill. Understanding this distinction early — ideally before you complete an acquisition or incorporation — is essential. Always take specialist advice when goodwill is involved, as the rules are complex and the amounts at stake are often significant.