Sale of Shares

What happens if you sell a share to connected person?

Disposal takes place at MV

What additional considerations need to be taken if the share disposal is not of a material interest?

FMV obtained, HMRC may need to involve share valuations team so consideration given for post transaction valuation check prior to submission of tax return

the value of shares should not reflect premium for control - need to discount for non-controlling shareholding.

When must BADR be claimed?

by 31 Jan following filing date for return for the year in which gain is made

When must gift relief claim be made?

Within 4 years from end of TY of disposal

What is the effect of GR claim?

Defers part of the gain arising and reduces the base cost of the shares in recipient of gift.

What is GR restricted by?

Amount of cash proceeds which will be paid by recipient and the existence of non-business assets within company.

Set out the steps for calculating GR

Calculate gain before relief

Calculate business fraction by doing MV of CBA / MV of all CA

Calc max potential holdover relief: (MV less consideration) * CBA/CA

Deduct step 3 from step 1 to calculate chargeable gain

What is a CBA?

an investment asset - eg goodwill

What is a CA?

things such as goodwill or investment property

What are IHT considerations when selling share to connected person at undervalue?

Sale at undervalue = loss to estate.

With gratuitous intent, the loss is a PET for IHT purposes.

When does BPR need to be considered?

If the PET becomes chargeable on death within 7 years

when does BPR reduce a PET?

If recipient still owns the shares on your death or

Recipient has disposed of the share and fully reinvested the net proceeds in other relevant business property

If your recipient is considering sale of company within 7 years what are considerations for IHT purposes?

• Recipient can consider insuring against potential liability by taking out a policy on your life

• You can take out life insurance policy under which proceeds are paid to recipient. Monthly premiums would reduce your estate and be exempt as normal expenditure

What is BPR restricted by?

Except assets within the company i.e an asset whic is neither:

• Used wholly/mainly in business for 2yrs preceding transfer or

  • not required for future use in business

What are SD implications on sale of shares?

Recipient liable for SD on 0.5% * consideration

What happens where goodwill is disposed of to a connected company?

The gain arises on disposal where the transferor owns 5% or more of the share capital

Open market value must be used when reporting the consideration for the sale

What woudl happen if HMRC seek to challenge value of goodwill on disposao?

They will seek to treat part of all of the amount drawn down as remuneration as a distribution

Company would then have to pay over the resulting PAYE / Class 1 NIC

What are the bed and breakfasting rules?

If within any period of 30 days, repayments of £5k or more are made and then a further amount of £5k or more is borrowed in a subsequent accounting period then the repayment will be restricted

What do companies need to do when someone loans then money on which interest is paid?

Withhold incom tax at 20% on the interest

Payment of int and income tax deducted should be reported via form CT61

When are form CT61’s due?

must be submitted to HMRC 14 days after calendar quarter in which the interest is paid

What are conditions for an associated disposal?

Sale of property made in conjunction w material disposal

Part of withdrawal requires sale of at least 5% interest in Ord share cap

There are no arrangements for repurchase of the shares

Property owned for at least 3 years and used for trading purposes 2 years up to sale of shares

What is max period between sale of shares and disposal of property to be an associated disposal?

Not defined but HMRC accept if sold within 3 years of share sale, if property only used by company in the meantime

Conditions for capital route POOS

Must be for benefit of trade

Uk resident and held shares for at least 5 years

Must have substantial reduction in holding (less than 75% of original)

Individual must not be connected following buyback

How does income route work on POOS?

Income Tax = Consideration - Subscription price (£1)

Deduct the base cost from the above to get the capital loss

Does a non-participating shareholder meet the trade benefit test (POOS)?

Possibly - submit clearance to be sure

What should you do if your shareholding is going to be diluted due to someone exercising their EMI options?

You can make an election for a deemed disposal and reacquisition at MV of the shares immediately before dilution - BADR can be claimed on this notional gain

What is a CGT election 2?

Election to defer gain until share actually disposed of - must be made by 5 April, 4 years from end of TY of notional disposal.

Implications of repaying DLA

Company can recover s455 paid

Repayment is not taxable

Implications of writing off DLA

Individual subject to dividend tax

Deemed as earnings and company pays Class 1 NICs

Company can recover s455 paid

Implications of sale of shares which include goodwill

BADR cannot be claimed where transferor owns 5% or more.

Use AEA

What will HMRC do if they agree a lower value than you used for your goodwill?

Treat anything drawn down as remuneration or a distribution

What are conditions for a company to be able to purchase own shares?

Shares must be fully paid up

Shares must be paid for on purchase (not through loan balance)

Purchase made out of distributable reserves, capital or cash

Purchase must be authorised by ordinary resolution

POOS - multiple completion contract?

HMRC consider beneficial ownership of all shares passes at the date of the contract

What is an EOT?

An indirect form of employee ownership where trust holds controlling stake on behalf of all employees

What happens if free/discounted shares are made available to emlployees?

Income tax charge on employee at date of award.

CGT exemption on EOT?

Made when controlling interest is transferred (NGNL disposal) and qualifying conditions remain for following 4 tax years

IHT exemption on EOT?

yes - in respect of property disposed of to qualifying EOT

IT exemption on EOT?

Up to £3,600 on certain bonuses paid.

Does the company need the full funds to purchase shares for EOT?

No - it can borrow money and then repay loan out of future profits

advantage of using QCBs as consideration?

proportion of total gain is not chargeable immediately. Comes into charge as and when LNs are redeemed

disadvantage of loan notes?

no BADR and loans may not be repaid due to commercial risk

stamp tax implications share sale v T&A

T&A - SDLT on acquisition of property

Share sale - SD 0.5%

can you use subsidiary as sale vehicle?

yes transfer selected assets to it.

within chargeable gains group so NGNL

TWDV transfer so no charge