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CGT on deferred consideration
Revenue have accepted the disposal is business asset taper relief applicable and that proceeds can be subject to CGT in the year they are received.
With the change in CGT taxation rules on 6th April 2008 does this mean the the deferred proceeds received after this date will be subject to CGT at 18% rather than 10% 'cos that seems unfair as it was neither clients option to receive deferred money - nor that the buyer is now defaulting on the instalments, therefore pushing more of the proceeds back to after 5th April 2008.
Carlos Fandango
Number of comments: 18
AccountingWEB.co.uk 15-Jan-2008
Categories: Any Answers
Times read: 3083
Just adding this point, for others who join this thread after 24/1:
One now assumes that the relief announced yesterday might apply to the QCBs in Carlos's case. At the time of writing there is no draft legislation and no word on transitional provisions. HMRC say that draft clauses are still being written and will be out in two weeks, and any transitional provisions are still in the melting pot...
it's a question of cash flow. If I had an enquiry going on I would not want to move the goal posts. The earlier the liability is due the worse it is cash wise. If the client could "sell" the loan notes to a trust or other entity prior to 6th April 2008 and then they could be cashed in time to pay the tax in January 2009 that might be worth exploring.
I would keep poking the Big 4 firm involved for assistance. If the liability was agreed to have been due in an earlier period there would be interest due on latte payment and maybe not enough to settle it now depending what has happened to the original money.
Yeh, I thought about the cashing in of the loan notes pre 060408 to crystallise any gain pre-change of rules.
Company is tight cashflow wise, so I thought the only way to pay out the loan notes would be if my client lent the company £500,000, so the company could pay off the £500,000 loan notes.
But I thought the revenue would take a pretty dim view of this and disallow it as a linked transaction - any suggestions.
Or do I go to the Revenue before the enquiry is closed and suggest all of the gain should have been taxed in the year of sale and not spread!
you may be ablwe to access the proceeds earlier
1 by doing a deal with the putchaser
2 by use of a letter of credit
also factor in the cost of money, if you do not have to pay the CGT for at least a year
I stand by my previous answers; that the BATR anticipated beyond 5.4.08. will be lost in favour of the 18% flat rate (perhaps favour is the wrong word). You might have to rely on the goodwill of the purchaser to crystallise the gains in 2007-08 by cashing the loan notes, which might be a cash flow issue for them. Otherwise your client is probably stuffed.
I've answered my own question back on the original thread with additional information
you say its set in stone so its simply deferred consideration - unless youu have missed something on the loan notes . its all taxble in 04 05 in my thinking
(my client) gets the consideration of " Earn out loan notes" in Dec 2006 at which point the value is unascertainable by December 2007 some of the loan notes have been encashed (the value being based on the company's turnover to 31 Jul 2007)
was the disposal proceeds for 0607 now to be regarded as the amount now asertained in Dec 07 or does the disposal effectively take place in 0708?
the disposal is in 06 07 and it is the amount received + the discounted value of the loan notes at that date. as the encashment is quite soon after in 07 08 then that value can be used as the basis of the discounted value for some or all of the shares.
yuo get a discount beacuse you have to wait for the proceeeds NPV
if the loan notes are likely to vary in value then you have another conundrum about fixing the value thereof as you may be in ffurther CG profits or losses.
say the loan notes were fixed for 1000 at 06 07 and they actually realised 1500 then you would probabay have another CG calculation
Thanks for all your comments but, just to clarify;
Client sold out for £4.0m (figure set in stone)
Got c£3.2m by the end of the tax year of sale
Remaining £0.8m (currently loan notes) has been/will be received by end of 2008/09 tax year.
Have currently used split year treatment, asessing gain in year of receipt, using batr each year as gain is due to disposal of business initially.
Year of initial disposal is currently under investigation by HMRC, and using the split year treatment has never been mentioned as being wrong by HMRC, although investigation not yet concluded (but is near end).
Client did see a big four firm about the whole structuring of the disposal so I take it that whatever way is was structured was deemed to be tax efficient.
I've now written to the big four firm twice about this client and have yet to receive a reply.
Any help to you!
Nicholas allow me to transfer part of query to this thread
the seller of shares (my client) gets the consideration of " Earn out loan notes" in Dec 2006 at which point the value is unascertainable
by December 2007 some of the loan notes have been encashed (the value being based on the company's turnover to 31 Jul 2007)
was the disposal proceeds for 0607 now to be regarded as the amount now asertained in Dec 07 or does the disposal effectively take place in 0708?
... seems like we were all having a bad day.
Just hope CF can find his way through the maze. But I'm with you as to why HMRC would agree split year treatment - unless (just maybe) claim made under the hardship rules because the deferred instalments were so large. But should this change the tax treatment ie disposal in earlier period and 75% BATR.
Regards
Mike
and i was having a bad day till then......
but it is an interesting case you are right about def con , but i read it as such and probably unascertainable at that,
if simply paid in instalmenst does it really qualify for split year calculation
NM - what does ' ... HMRC accepts.proceeds can be subject to CGT in the year they are received' actually mean! You thought it meant one thing, I read it differently. Only CF knows the answer to that.
If the quantum is ascertainable (and the amounts are all cash) then I agree that the disposal date is date of contract. But are there loan notes?
However CF will need to consider whether:
1. the instalemts are simply deferred amounts
2. deferred as a result of loan notes (and wheter QCBs/non-QCBs)
3. the amounts are unascertainable (Marren v Ingles)
and then pick his way through the responses.
taken other commenst on board am slightly surprised by IR commenst mind you its damngerous torely on them - if the shares are sold in tranches then split year gains are a real posibility
one other thing its the date of the recipt of the notes not when they redemmed necessarily
We are not told that we have a Marren v Ingles situation and unascertainable proceeds to come. If the future consideration is known (which I thought was implied in the question) then I stand by my answer, which was based the assumption that loan notes of some description -preferably non-QCBs - in a quantified amount had been issued. It is true that as suggested BATR might not have been due on future payments as described by our colleague, though that might have been rather unsatisfactory tax planning in the context of what was expected at the time.
In other words, loan notes may defer crystalliisation of a gain beyond 5th April 2008, but the tax due would end up being higher if BATR had been anticipated because it is apparently being abolished.
probably not! i disagree with the last guy. CGT is payable by reference to the transaction date rather than the recipt date so all is taxable in 2007 08 even if it is not received till 2008 09
there are a couple of othere threads on def con and also look at this
http://www.hmrc.gov.uk/manuals/cg3manual/CG58080.htm
You make a presumption that the receipt of deferred consideration qualifies for BATR - not usually the case.
The original CGT calculation for the disposal of the shares would have included a value of the right to the deferred consideration (Marren v Ingles etc) and that taxed at an effective rate of 10% (assuming BATR applies).
The subsequent receipt of the deferred consideration will represent a disposal of the right to receive - which is not a business asset. Gain will be proceeds received less value included at time of original disposal.
Therefore only non-business asset taper applies with probably an effective tax rate of 40% (unless > 3 years when it is 38%. So receipts after 5 April 2008 (rather than before) will get you a saving 40% to 18%.
So it is not all bad news.
Mike Bell
then yes, there will be an 18% tax liability on gains deemed realised after 5th April 2008. No, it probably is not fair and that is partly what the fuss is about. All deferred gains including some rolled over years ago will attract the higher rate under the current proposals.
