What are intangible assets?
Intangible assets are valuable resources with no physical form, such as goodwill, trademarks, patents, software and customer lists, that a business owns and uses for more than a year.
What intangible assets mean
Assets are things a business owns that bring future benefit. Tangible assets can be touched: vans, computers, machinery. Intangible assets cannot, but they can be just as valuable. Common examples include:
- Goodwill paid when buying another business
- Trademarks, patents and registered designs
- Software licences and developed software
- Customer lists, contracts and domain names acquired from others
- Franchise rights and licences
In UK accounts, an intangible asset is usually only recognised on the balance sheet if it was bought or, in some cases, developed at a measurable cost. Your brand's value that has grown over years of trading is real, but it is not shown, because it has no reliable cost.
Example
An accountancy practice buys a smaller firm's client list for £60,000. It records an intangible asset of £60,000 and decides the client relationships will benefit the business for around 10 years.
Each year it charges £6,000 of amortisation to the profit and loss account, so after three years the asset is shown at £42,000. If clients leave faster than expected, the asset may need writing down further, called an impairment.
Why it matters for your business
When you buy a business, much of the price is often for intangibles rather than equipment. How the price is split affects your balance sheet, your future profits and your tax. Intangibles can also be used as security for borrowing, and they are a big part of what a buyer pays for when you eventually sell.
Protecting intangibles matters too: registering a trademark or making sure contracts say your business owns the code a developer writes for you can protect value that is easy to lose.
The UK tax angle
For companies, most intangible assets created or acquired since April 2002 fall under the corporate intangibles regime. Tax relief generally follows the amortisation charged in the accounts, or a company can elect for a fixed 4% a year. Relief for purchased goodwill is restricted in some cases. Sole traders and partnerships are taxed differently. The rules are technical, so take advice before buying a business or its intellectual property.
Common questions
Yes. Purchased goodwill, the amount paid for a business above the fair value of its separate assets, is the most common intangible asset. Goodwill you build up yourself is not recognised in your accounts. It is shown separately on the balance sheet and amortised over its useful life.
They lose value through amortisation, which works like depreciation but for intangibles. Under UK standards, intangibles are amortised over their useful life, which is presumed to be no more than 10 years if it cannot be reliably estimated.