CGT disposal proceeds or not?

CGT disposal proceeds or not?

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Client company is owned 40% by husband, 40% by wife and 20% by unrelated individual.  Share capital is £700 and NAV of the company is £700,000.  External investors are coming in, subscribing for new shares and providing loan funding.  The 20% shareholder will not have a siginificant role in future, and he has agreed to cut his shareholding to 5%, by dilution and/or by disposal to the other existing shareholders before the new investor comes in.  The new injection of capital will immediately increase the value of the company, more than doubling the NAV, and it is expected to increase future profitability as well.  Consequently the shareholder's reduced 5% holding should have a value which is broadly equal to the current value of his 20% holding (otherwise he wouldn't be agreeing to it).  In fact, at the price which the new investor is paying for shares - over £1m for 30% - the future 5% holding would be worth more than the current 20% holding. 

The company has no cash to do a share buy-back.  Dilution of the 20% by a rights issue at par, which the other shareholders would take up, would cost too much in tax & NIC on employment-related securities.  The current proposal is that the 20% shareholder sells some of his shares to the 40% shareholders at par, giving him no capital gain or loss.  He is not connected to them.  This is a transaction at arm's length.  But my question is this: will the increase in the value of his remaining 5% count as disposal proceeds of the shares he sells?  It will not arise from any payment to him; rather from an unconnected party investing in the company.  But to protect his position, his disposal will no doubt be conditional on the new investor signing up to its investment (and so the increase in value happening). 

My view is that the increase would probably not rank as disposal proceeds, so he would have no CG.  But I'm not sure, and maybe a new holding company on top would be safer. 

All thoughts greatfully received! 

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By John - Horler Tax
23rd Oct 2013 12:25

Don't agree

The sale of the shares is a disposal.  That disposal is designed to provide a benefit to the other shareholders, it is therefore potentially a disposal not at arms length and if so MV applies.

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By johngroganjga
23rd Oct 2013 12:31

Agree with the above. MV

Agree with the above. MV rule applies to all transactions not at arm's length, not just between connected parties.

EDIT

But if the company is a trading company any gains can be held over with the agreement of the transferees.

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