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Goodwill

Also known as: Business Goodwill, Intangible Business Asset

Definition

Goodwill is the intangible value of a business beyond its physical assets, including reputation, customer relationships, and brand recognition that make the business worth more than its tangible components alone.

For business owners, goodwill must be valued as part of your estate for inheritance tax purposes, even if it doesn't appear on your balance sheet. Understanding goodwill is essential because it often represents the largest component of business value.

What Does Goodwill Mean?

Goodwill represents what HMRC describes as "the attractive force which brings in custom"—the worth of a business over and above its tangible value. Under the Companies Act 2006, goodwill includes "reputation of any description," encompassing customer relationships, brand recognition, location advantages, and established processes. When a business sells for more than its net asset value, the difference is largely goodwill.

HMRC requires goodwill to be valued at open market value on death under the Inheritance Tax Act 1984, regardless of whether it's recorded in your accounts. This valuation is handled by HMRC's specialist Shares and Assets Valuation team. Dr. Sarah owns a GP surgery worth £800,000, but the equipment and lease are only worth £250,000. The remaining £550,000 is goodwill—her patient list, reputation, NHS contracts, and referral relationships. For service businesses, goodwill can represent 50-80% of total value.

Two types exist: personal goodwill (tied to the owner's skills) and enterprise goodwill (attached to the business itself). James runs a consultancy valued at £400,000 for inheritance tax, comprising £150,000 enterprise goodwill and £250,000 personal goodwill. His family could only sell the business for £150,000 after his death because personal goodwill doesn't transfer.

Goodwill can qualify for 100% Business Property Relief if part of a trading business you've owned for at least two years. From April 2026, BPR will be limited to the first £1 million of combined business and agricultural property, with only 50% relief above this threshold. A £2 million business interest would face £200,000 inheritance tax liability under the new rules.

Common Questions

"What is goodwill and why does it matter in estate planning?"

Goodwill is the intangible value beyond physical assets—reputation, customer relationships, and brand recognition. It must be valued for inheritance tax even if not on your balance sheet, and can represent a significant portion of your estate's value.

"How is goodwill valued when someone dies?"

HMRC requires goodwill to be valued at open market value as at the date of death. This valuation is handled by HMRC's specialist Shares and Assets Valuation team, who consider customer loyalty, reputation, location advantages, and expected future earnings.

"Can goodwill qualify for Business Property Relief from inheritance tax?"

Yes, at 100% if part of a trading business you've owned for at least two years. Businesses mainly dealing in investments, property, or securities don't qualify. From April 2026, BPR is limited to the first £1 million, with only 50% relief above this threshold.

Common Misconceptions

Myth: "If goodwill doesn't appear on my balance sheet, I don't need to worry about it for inheritance tax."

Reality: HMRC requires goodwill to be valued at open market value on death, even if never recorded in your accounts. Most businesses only show purchased goodwill on balance sheets. Your executors must assess and value goodwill as part of the inheritance tax calculation.

Myth: "Goodwill is only relevant for large corporations—my small business doesn't have any."

Reality: Even small businesses often have substantial goodwill. If customers choose your business over competitors, you have repeat clients, or your location brings in trade, you have goodwill. Self-employed plumbers, corner shops, and freelance consultants all typically have goodwill.

  • Business Assets: Goodwill forms part of total business assets, often representing the largest component of service business value.
  • Company Valuation: Goodwill typically represents the difference between asset value and overall business value.
  • Business Succession Planning: Goodwill transferability determines whether successors can realize full business value.
  • IHT Valuation: Goodwill must be included at open market value, even if not on balance sheets.
  • Business Property Relief: Goodwill qualifies for 100% BPR if part of a trading business owned for two years.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.