What is goodwill?
Definition of goodwill
Goodwill is an intangible asset that forms part of a business’s capital assets. It reflects positive sentiment for a business, along with the business's reputation and the size of its existing customer base. Goodwill is usually taken into account by a potential buyer when the value of a business is being assessed for purchase.
Goodwill is considered to contribute to the value of the business that’s being purchased. When one business buys another, goodwill represents the amount that the purchasing business pays over and above the value of physical assets such as stock, property and working capital.
Until a business changes hands, no value will appear in the business’s books for goodwill. This is because it’s impossible to put a value on goodwill until it is known how much a buyer is prepared to pay for it.
As an intangible asset, goodwill does not depreciate but may amortise, which means that part of its value is treated each year as a running cost of the business. The value of the goodwill reduces as it amortises.
Corporation Tax relief on goodwill
Corporation Tax relief on goodwill is available for businesses that made a purchase on or after 1st April 2019, subject to certain conditions. This means that the business can use the amount of amortisation of goodwill that it enters into its accounts to reduce the amount of profit on which it pays Corporation Tax.
Goodwill in FreeAgent
Our Knowledge Base article has more information on how to record goodwill in FreeAgent.