541B Restrictive Covenants

This section ensures that any amount paid to a person in consideration of the person giving or fulfilling an undertaking which restricts the person as to their conduct or that person’s activities will, if not chargeable as income or included as consideration for the disposal of an asset, be treated as an amount of chargeable gain.

For example where a person disposes of a business there is sometimes an agreement with the purchaser that he or she will not, for a certain period of time, or within a certain radius, compete with the new owners of that business. This is sometimes called a restrictive covenant or a non-competition agreement. In most situations the consideration which the person receives for entering into that agreement forms part of the consideration for the disposal of an asset (i.e. s the goodwill of the business) and is brought into account for capital gains tax purposes. However, there can be situations where such a payment cannot be associated with a disposal of goodwill – for example where it can be successfully argued that the business has no goodwill as might be the case where a company had not yet commenced trading. In such a situation, this section will treat the amount of the non-competition payment as an amount of chargeable gain liable to capital gains tax. (See section 127 regarding the tax treatment of payments made under a restrictive covenant to an individual in respect of his or her office or employment.)

Relevant Date: Finance Act 2021