Hello,
I have a client making an acqusition in a slightly unusual way. I can't see any tax problems but the broker seems concerned so if anyone wants to venture a second opinion that would be great.
Scenario:
My client is buying X for £500k cash free/debt fee. There is currently £200k of cash in the X so the seller wants my client to pay £700k (for capital gains).
Problem is that my client doesn't have £200k. So the arrangement is that on completion my client passes the £200k straight from newly acquired bank account to their lawyer who then passes it on to seller. The remaining £500k is then paid out over two years from the bank account of the newly acquired company.
I can see that from the sellers POV this could maybe be problematic as HMRC might say it's all a farce and really a dividend. From my client's POV though I see no issues. Any thoughts?
Thanks
Tim
Replies (3)
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Confusion of issues
I take it X is a ltd company?
From the vendors point of view he is receiving deferred considerations of a quantifiable amount so is chargeable to CGT on the full consideration as at contract date of sale.
If it is a ltd company then the withdrawals of capital from the company are the new shareholders problem, not the old. What are the payments classed as - salary, dividends?
The only way I would expect there to be payments to the seller from the company without implications for your purchaser rely on the company having traded for over 5 years. A sale of a small number of shares to your client, followed by a company buy back would result in the original shares being cancelled and your client ending up with the company. The buyback could be in tranches to spread the gains liability over 2 years.
Bad selection of terms
Sorry - when I said capital I meant money and thought your client was an individua using funds within the company for a personal transactionl.Who will end up owning the shares of the new company?
If client company owns 100% of new company and there is an inter-company loan so that client co is paying the consideration seems okay from a tax point of view but I am afraid I am not able to help on accounting issues.
A dividend from newco in those circumatances, subject to reserves, to client co would be tax neutral and not repayable..
The buyback would not be necessary - it is to enable remaining shareholders to increase their proportion of the shareholding without having to buy extra shares personally when the leaving shareholder is withdrawing from the company. As the bought back shares have to be cancelled the client would end up as the sole shareholder in your case