This feels wrong....

This feels wrong....

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Company A wants to purchase Company B's shares. Company B has some money in the bank and Company A will purchase the shares and pay for the cash in the bank but can't afford to. It has been suggested that Company B should lend Company A the money being a loan equal to the cash it has. Company A will then purchase the shares of Company B, and pay the outgoing shareholder of Company B all of proceeds and they will have a capital gain. The loan between Company A and B will be repaid in due course. I know there are no s455/459 issues but I can't find anything else at the moment as to why we shouldn't do this - help!

Replies (21)

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By User deleted
19th Jun 2015 15:11

It works

(I assume that there is no existing connection between A and B)

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By TaxGeek198
19th Jun 2015 15:16

Wow!

Really? It just seems so wrong, doesn't it? I would have expected there to be some kind of anti avoidance whereby the individual selling the shares would be taxed on the cash as if they had taken a dividend from the company (although there is nothing to say that). It just feels so artificial, so artificial that I wonder if the GAAR is in point

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By User deleted
19th Jun 2015 15:21

Why is it artificial?

Company B, including its cash, is worth £x. If company A wants to buy it for £x then there is nothing to stop it from doing so - there is nothing to force B to distribute its cash first, even though that may have given a better tax outcome for HMRC.

B could just as easily borrow from the bank to finance the purchase and, say, pay up a dividend later in order to repay the bank debt.

Presumably the vendor is walking away after the deal and will not have a stake in A.

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RLI
By lionofludesch
19th Jun 2015 15:25

No - I don't get it

I just don't understand why you feel it's wrong. It's just a timing difference.

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By TaxGeek198
19th Jun 2015 15:27

It feels artificial...

Because the vendor of the shares is receiving cash in a capital form when that cash would usually be chargeable as a dividend if they removed it from the company. After some serious searching I've managed to find some guidance which makes it seem ok. Well, I can certainly say I've learned something today. And you, sir, are my saviour!

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RLI
By lionofludesch
19th Jun 2015 15:41

They're not, though, are they ?

They're borrowing (say) £100000 to buy £100000 of assets (cash) and then using those assets (the cash) to pay off the borrowing.

Where's the income/dividend in that ?

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By maxaca
19th Jun 2015 15:42

bank account sold with shares?

I think the cash at bank is a red herring - it forms part of the net assets of company B that will become a subsidiary of company A and will be/should have been reflected in the agreed consideration for the shares. Or is the price not really agreed?  The bank account is not the property of the former shareholder to be retained by him after the sale of his shares, it belongs to the company he is selling - he may have agreed for a similar sum to be included in the amount to be paid to him such that it will form part of his proceeds or he may be extracting a dividend before the sale, in which case the sale price should be reduced accordingly. He should be taxed thereon in either case. Either company A can or it cannot afford the agreed price for company B. If it cannot then it needs to borrow from somewhere.  Has any form of deferred consideration or installments based on warranties been agreed? As a subsidiary co B could lend cash to co A to fund the purchase.

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paddle steamer
By DJKL
19th Jun 2015 15:57

Presume not a public company

Presume it is a private company and not a public company? The use of shareholder not shareholders suggests this may be the case.

 If not there is possibly a need to look at the financial assistance rules within the Companies Act 2006, secs 677 onwards.

This is well outwith my comfort zone but the previous regime re financial assistance,that endured pre the 2006 changes, may be what is niggling at the back of the mind of the OP.

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By TaxGeek198
19th Jun 2015 16:04

The financial assistance...

issue has apparently been cleared by the solicitor. Another quick question - would it be safe to write the loans between the two companies off once the transaction has gone through?

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Replying to DJKL:
paddle steamer
By DJKL
19th Jun 2015 16:21

I think you need to be very sure

TaxGeek198 wrote:

issue has apparently been cleared by the solicitor. Another quick question - would it be safe to write the loans between the two companies off once the transaction has gone through?

I think you need to be very sure that there is matching tax treatment for the company forgiving and the company being forgiven, and that any losses/deficits that arise can be transferred (surrendered) between the companies to avoid the party being forgiven being taxed and the party forgiving not obtaining relief.

Not an area I am very hot on but sure someone else will be along to advise.

 

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By User deleted
19th Jun 2015 16:12

You could safely write the loan off

Provided that there are no creditors that would be prejudiced.

Or, has been suggested elsewhere, a dividend could be declared to cover the outstanding debt (subject to there being adequate reserves).

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By TaxGeek198
19th Jun 2015 16:14

No reserves sadly, the loan would clear the company out

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Replying to alipearson:
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By User deleted
19th Jun 2015 16:23

?

TaxGeek198 wrote:

No reserves sadly, the loan would clear the company out

Since when did the making of a loan reduce reserves?

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Replying to DJKL:
RLI
By lionofludesch
20th Jun 2015 10:09

What about .... ?

BKD wrote:

TaxGeek198 wrote:

No reserves sadly, the loan would clear the company out

Since when did the making of a loan reduce reserves?

What about when it's forgiven ?

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Replying to Wilson Philips:
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By User deleted
24th Jun 2015 15:01

Forgiveness

lionofludesch wrote:

BKD wrote:

TaxGeek198 wrote:

No reserves sadly, the loan would clear the company out

Since when did the making of a loan reduce reserves?

What about when it's forgiven ?

What about it? I referred specifically to the making of a loan, not to its release.

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By TaxGeek198
19th Jun 2015 17:00

My bad...

My accountancy knowledge has failed me!

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By User deleted
20th Jun 2015 11:40

This is how ...

... more or less the Glazers bought Man Utd, at the time cash rich, and saddled it with crippling debts!

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RLI
By lionofludesch
20th Jun 2015 15:48

Every penny

Stripping out every penny is likely to be a disaster.  Buying and extracting cash surpluses, maybe not.  It's a question of degree.

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By Montrose
24th Jun 2015 14:52

Transaction in securities?

Have you considered whether ITA 2007, Part13 applies? Are you applying for clearance under ITA s.701?

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By JamesAnd
24th Jun 2015 15:21

Could company A make management charges to company B then use to clear the loan?

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By mickeyparish
29th Jun 2015 18:17

Used to be called a whitewash

We did just that when I set up a new holding company with a new business partner to buy out my former company.  The new holding company borrowed some of the money from its future subsidiary's cash reserves, and we had to go through a procedure called a whitewash with our accountants to satisfy the Revenue that the transaction was legit.  That was 7 years ago.  The loan is still outstanding.  I have since been told that the whitewash procedure is no longer required in such cases.

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