Share swap

Share swap

Didn't find your answer?

Two unconnected parties with their own personal companies of similar value wish to swap their shareholdings.  Can this be done on a tax neutral basis as S135 TCGA 92 doesn't apply since no shares are being issued?  If not do both of them have to pay CGT even though effectively there are no proceeds?

Replies (17)

Please login or register to join the discussion.

Portia profile image
By Portia Nina Levin
20th Oct 2014 13:09

Yes

If you exchange the shares, then each individual has a disposal and the proceeds figure.

What you do is each sells the shares to the other for some arbitrary (but clearly non-arm's length) amount and make holdover elections.

That will then be tax neutral.

Thanks (0)
By gbuckell
21st Oct 2014 10:05

Holdover elections

Why would holdover elections be available? Surely each is receiving consideration in the form of shares in the other company which would prevent a holdover election.

Why do they want to swap companies? There is likely to be a better way to achieve their objective.

Thanks (0)
Portia profile image
By Portia Nina Levin
21st Oct 2014 10:17

Holdover elections

Elections will be available if each sells their shares (under separate sale contracts, but executed simultaneously) to the other for some (non-arm's length) monetary consideration (both considerations being equal).

They will each owe and be owed the same amount of money, and can offset their debts against their liabilities.

It is quite simple really.

Thanks (0)
By gbuckell
21st Oct 2014 14:33

Holdover elections

TCGA 1992 s165 is entitled Relief for gifts of business assets. In fact it can apply where the consideration is no more than cost. In this case the consideration is the market value of the shares received. At best a partial holdover claim might be available in relation to the disposal of the shares valued higher than the others, if such was the case.

Thanks (0)
Portia profile image
By Portia Nina Levin
21st Oct 2014 15:35

No, no, no

Section 165 applies to disposals made under bargains otherwise than at arm's length.

So:

A contracts, in writing, with B to sell his shares (which cost £100) for £100, with B having no obligation to transfer his shares.

B just happens to simultaneously to sit down at the same table and contract, in writing, with A to sell his shares (which cost £50) for £100, with A having no obligation to transfer his shares.

Those are two entirely separate transactions. See http://www.hmrc.gov.uk/manuals/cgmanual/CG14543.htm

A owes B £100 and B owes A £100. They agree to set the £100 owed to them against the £100 they owe. A has a £50 gain covered by his annual exemption. Before they each wander off into the sunset with their new shares, they make holdover elections.

Now HMRC come along and argue that the shares have been exchanged. A and B can produce written sale and purchase agreements to show that the shares were sold for £100 with no obligation on the other party to transfer their shares. HMRC argue that they are bargains otherwise at arm's length, at which point A and B wave their holdover elections at them.

End of story.

Thanks (0)
By gbuckell
21st Oct 2014 16:14

Yes, yes, yes

You refer to CG14543. This is not very helpful as it refers to a scenario where one party is selling two different assets to another party. One needs to look at the reality. To say there are two separate contracts in your example is a nonsense. In reality the consideration for one transfer is the value of the shares received. See http://www.hmrc.gov.uk/manuals/cgmanual/cg14500.htm You are trying to claim that two gifts took place in opposite directions. That is a serious strain on the meaning of a gift!

Thanks (0)
Portia profile image
By Portia Nina Levin
21st Oct 2014 17:17

You need to read CG14543 again

"Mr B gives a gratuitous benefit [non-obligatory under the sale contract] to the developer when he sells the fields for £10,000" and "the developer gives a gratuitous benefit [non-obligatory under the sale contract] to Mr B when he buys the house for £140,000".

We have an underlying exchange of gratuitous benefits, but we separately examine the two transactions based on the actual contractual obligations.

We can thus avoid an actual exchange of assets, because we have a (contractual) consideration expressed wholly in money.

Instead we now have two bargains made otherwise than at arm's length, by reason of an underlying exchange of gratuitous benefits [non-obligatory under the contracts]. Those transactions are still deemed to take place at market value, but it permits holdover elections to be made.

It avoids more complicated ways to achieve A's and B's objectives.

Thanks (1)
By gbuckell
21st Oct 2014 18:23

Substance over form

I think you are reading too much into CG14543. There HMRC are applying s17 which gives the answer they want and they need go no further. However, if necessary, I do not think it would be difficult to persuade a Tribunal that part of the consideration for the sale of the field was in the form of excessive consideration ostensibly paid for the house. The two transactions are linked – one would not happen without the other. A more difficult argument perhaps but one I believe would prevail.

The same principle applies here. Consideration is passing both ways. To pretend otherwise by the fiction of two non arm’s length but separate contracts is nonsense. Again the two are clearly linked. I would not rate your chances before a Tribunal.

But I also think we are now both in our trenches lobbing hand grenades. I guess we must agree to disagree.

Thanks (0)
Portia profile image
By Portia Nina Levin
23rd Oct 2014 10:14

Impasse noted

But surely with respect to either sale of shares, the consideration given over and above the £100 cash is not the other shares, but the entering into the corresponding sale contract.

That analysis then makes it no different from the situation described in CG14543.

Economic substance does not prevail over legal form for tax purposes, although commercial substance does.

It is true that neither contract would be entered but for the other, but that makes them bargains otherwise than at arm's length rather than an exchange.

Thanks (0)
Nichola Ross Martin
By Nichola Ross Martin
23rd Oct 2014 10:37

Just gift?

Surely a s165 hold-over election is made, one gifts shares to one and one gifts shares to the other.

There is though an employment related securities problem.

Easier to set up a new company?

 

 

Thanks (0)
Portia profile image
By Portia Nina Levin
23rd Oct 2014 10:52

Just gift?

Is that not then an exchange to which TCGA 1992, section 17(1)(b) will definitely apply, thus preventing an election under section 165, which is what I and the learned gentleman have been discussing.

Admittedly, that would get around the ERS issues, without having to argue that these are individuals entering into transactions in the normal course of their personal relationships.

Overall though, I am forced to the view that you have not got a clue what you are talking about.

Thanks (0)
Nichola Ross Martin
By Nichola Ross Martin
23rd Oct 2014 12:53

Clueless? Just looking from a different angle

If A gifts half his company to his new director he can do that without any worries other than ERS.

He could just allot new shares - so there you have it one company two owners.

If the new director also has a company and does the same back we really at the end of the day have a merger of two businesses. 

Although as I said before easier to set up a newco and avoid any of it.

Thanks (0)
Portia profile image
By Portia Nina Levin
23rd Oct 2014 13:14

The OP appears to be suggesting

That A gives all of his shares to B and in return B gives all of his shares to A, hence the conundrum discussed, without ERS issues.

If the OP's question matches your interpretation of two people swapping their shares, then I would be in agreement with you. I just interpreted swap to mean something different.

Thanks (0)
Nichola Ross Martin
By Nichola Ross Martin
23rd Oct 2014 13:38

Just trying to think outside the box

saw the post and you two not agreeing and thought there could be a different way. Can't really avoid ERS really if there is a gift, but of course maybe they are not intending to be each other's directors or employees.

Thanks (0)
By gbuckell
23rd Oct 2014 14:22

ERS

I read the question as a complete exchange but Nichola makes a good point. It seems highly likely that each will become a director of the company just acquired. Therefore, sticking to the fiction of gifts, there must be an ERS issue for both parties. But I gave full consideration he cries to the accompaniment of the tearing up of a s165 election!

Thanks (0)
James Reeves
By James Reeves
23rd Oct 2014 14:36

Thinking outside the box - CPA 2004

Why don't the two unconnected parties form a civil partnership and gift each other the shares tax free? They can then apply for a dissolution and get on with their lives.

I heard about it from a bloke down the pub, so it must be perfectly legal.

Thanks (0)
Portia profile image
By Portia Nina Levin
23rd Oct 2014 14:45

Indeed James

They could even get marrried now, if they wanted.

That is apparently the reason for all our inclement weather, which I also heard from some homophobic MP while he was in a pub..

Thanks (0)