Tax implications of acquisition arrangement?

Tax implications of acquisition arrangement?

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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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By Marion Hayes
17th Nov 2011 20:07

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.

 

 

 

Thanks (1)
By Tkwhitehouse
17th Nov 2011 21:24

attempted clarification

Thanks for replying Marion. It is a ltd company.

I appreciate that the vendor will have to pay CGT and the buyer will also have to pay stamp duty on the full amount at date of sale.

I don't see it as any withdrawal of capital, at least I hope so anyway. To me it's just higher consideration but it's all a bit odd because of the source of the cash.

The crucial bit I forgot to say is that there will be an intercompany loan put in place so that it's as if the cash transferred from newly acquired co, to client co to vendor. Then I am left with a big receivable on newly acquired co and big payable on the client co. Presumably I can write them off later (even if it goes beyond distributable reserves?) as we own 100% of both.

I'll think about the buyback idea a bit more but the intention is for client to own 100% on completion.

Thanks for that it has made me see the problem more clearly and it's not really one of tax .....

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By Marion Hayes
18th Nov 2011 09:24

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 

 

 

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