Who Really Owns the Value in an IFA Client Bank?

For many financial planners approaching retirement or succession, the sale of a client bank represents the culmination of years of relationship building. Yet a crucial question often sits at the heart of these transactions: who actually owns the value being sold?

Where a financial planning business operates through a limited company, it is often assumed that the client bank belongs to the company. However, recent case law has highlighted circumstances in which some or all of that value may belong personally to the adviser who built and maintained the client relationships.

The answer can have significant implications for tax treatment, transaction structure and the proceeds ultimately retained by the seller.

Looking beyond the term “client bank”

One of the biggest challenges is that the phrase “client bank” is frequently used to describe a collection of different assets and rights.

These may include goodwill, client relationships, recurring fee income, client data, contractual rights, restrictive covenants and post-sale handover services. Each component may have a different owner and different tax consequences.

Before considering tax treatment, it is therefore essential to establish exactly what is being sold and who owns it.

Personal goodwill versus company goodwill

The key distinction is often between personal goodwill and company goodwill.

Personal goodwill arises from an individual’s reputation, expertise and trusted relationships with clients. This is particularly relevant in smaller financial planning firms where clients may identify strongly with a specific adviser rather than with the firm’s brand.

Company goodwill, on the other hand, is generated by the business itself. It may derive from the firm’s name, systems, staff, compliance infrastructure, marketing activities and operational processes.

In reality, many businesses contain elements of both. The challenge is determining where the value primarily resides.

The importance of Smith & Corbett

The most relevant tax authority in this area is Smith & Corbett v HMRC [2023].

In that case, independent financial advisers argued that certain client relationships and goodwill belonged to them personally rather than to their company. The First-tier Tribunal agreed, finding that the relevant relationships, reputation and future income-generating opportunities had never become assets of the company.

Several factors supported this conclusion. The advisers were personally regulated, clients had trust-based relationships with them as individuals, and there was evidence that clients would follow them between firms. Importantly, the company had not historically recorded the relevant goodwill as an asset.

The decision provides useful support for advisers seeking to argue that client-bank value may be personally owned. However, it should not be viewed as creating a general rule.

Why the position remains uncertain

Smith & Corbett is a First-tier Tribunal decision, meaning it is persuasive rather than binding. Its outcome depended heavily on the specific facts.

HMRC’s published guidance continues to emphasise that goodwill is normally inseparable from the business in which it is generated. As a result, HMRC may argue that client relationships belong to the company because it entered into client contracts, received the fees and provided the infrastructure supporting the advice process.

There is also a risk that payments received by an adviser could be treated as income rather than capital proceeds. HMRC may contend that amounts relate to consultancy services, introductions, client transition work or restrictive covenants rather than the disposal of a personally owned asset.

The Upper Tribunal decision in Smiley demonstrates HMRC’s willingness to challenge arrangements involving payments linked to client relationships.

Evidence is critical

Whether personal goodwill exists is ultimately a question of evidence.

Factors supporting a personal-goodwill argument may include clients identifying primarily with the adviser, an absence of restrictive covenants, no goodwill being recorded in company accounts and evidence that relationships were developed personally by the adviser.

The argument becomes more difficult where clients identify with the firm’s brand, multiple advisers service the client base, restrictive covenants exist or the company has historically treated goodwill as one of its assets.

Independent valuation evidence can also be important in distinguishing personal goodwill from company-owned assets and other rights being transferred as part of a transaction.

Tax treatment should be modelled

It is often assumed that a personal sale will result in a lower tax bill than a company sale. However, that should never be taken for granted.

A company sale may trigger corporation tax, followed by a further tax charge when proceeds are extracted. A personal disposal may fall within the capital gains tax regime and, depending on the circumstances, reliefs such as Business Asset Disposal Relief may be available.

The comparative outcome depends on the facts and structure of the transaction. Detailed tax modelling is therefore essential before any decisions are made.

The key takeaway

As consolidation continues across the financial planning sector, questions surrounding the ownership and taxation of client banks are becoming increasingly important.

The Smith & Corbett decision shows that there can be circumstances where the value associated with client relationships belongs personally to an adviser rather than to their company. At the same time, HMRC has credible counterarguments and remains likely to challenge unsupported claims.

For advisers considering succession or retirement, the lesson is simple: do not assume that ownership of a client bank is straightforward. Understanding exactly what is being sold, who owns it and how the transaction is structured could have a significant impact on the final tax outcome.