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Business Asset Disposal Relief’

Company liquidation – distributions over two tax periods

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Hello all.

I have a situation were the sole director/shareholder’s company was liquidated in Dec 2021. Liquidator distributed £150k in Feb 22 and a further distribution in June of around £125k plus another small amount due in the next month or so.

Just want to clarify, the treatment in the shareholders personal tax return. Am I correct, that I bring in the £150k in 2021/22 return and the £125k + further in the 22/23 return?

Obviously by doing this, will get two lots on annual CGT allowances.

Or do I need to bring the whole lot in the 2021/22 tax return?

Thank you in advance.  

Replies (17)

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By The Dullard
01st Jul 2022 09:18

You haven't provided sufficient information to extinguish a "neither" response. Assuming that the "neither" option doesn't apply, the two annual exemptions option does. There will, I'm sure, be some cost to be allocated between the two disposals.

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By Wanderer
01st Jul 2022 09:22

You head this question 'Business Asset Disposal Relief' but ask nothing about BADR in the text.

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Replying to Matrix:
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By Hugo Fair
01st Jul 2022 11:42

That thread seemed to generate a universal view amongst the responders that the proceeds are 'split' (i.e. apply to the tax year in which received).

Not my area of expertise, but:
a) is that the view of me learned friends?
b) if so, is that specific to an MVL ... or does it also apply to consideration received on disposal of a company (by sale of all shares) that is split across two tax years (e.g. Initial and Deferred consideration)?

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Replying to Hugo Fair:
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By The Dullard
01st Jul 2022 11:48

a) Yes.
b) It is specific to any situation in which there is no actual disposal, but capital sums are derived from an asset (the shares, which have not been disposed of), TCGA 1992, s 22. A share sale is a disposal and any deferred consideration is taken into account until it proves irrecoverable, TCGA 1992, s 48.

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Replying to The Dullard:
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By Hugo Fair
01st Jul 2022 12:35

Thanks for the rapid and timely response ... having very recently told (not advised) someone that the deferred consideration (from their share sale of the whole business) should be taken into account as at the sale date - i.e. only one year's worth of allowance.

That'll teach me not to stray outside my areas of competence (even on a friendly basis only) ... thank goodness my memory was working despite it all.
Heartbeat almost returned to normal!

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Replying to Hugo Fair:
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By Tax Dragon
01st Jul 2022 12:39

As Dulls says, CGT is all about assets and disposals. Why are you getting cash in an MVL? Because you own shares. Receipt of cash taxed as part [or final] disposal.

Your right to deferred consideration is also an asset (you swapped your shares partly for cash and partly for that asset). CGT rules normally look through this 'complication', but it's not always possible to do that (eg you don't know what you'll get). The disposal of that asset can therefore have its own tax consequences, as in Marren v Ingles.

(For completeness, I'd add that these are all transactions in securities, which may be subject to anti-avoidance rules. But that's a different question.)

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Replying to Tax Dragon:
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By The Dullard
01st Jul 2022 12:39

Marren v Ingles only applies in relation to unascertained deferred consideration. Ascertained deferred consideration (commonly referred to as debt) and contingent consideration is dealt with under s 48.

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Replying to The Dullard:
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By Tax Dragon
01st Jul 2022 13:02

Yeah, but I couldn't spell unassert... uncert... I couldn't spell that word. So I said "you don't know what you'll get".

Debt is also an asset. But exempt for the original owner. So the way the CGT rules look through the complication is by a combination of taxing the amount owed up front, ignoring any loss on disposal [repayment] of the debt (by exempting that asset) and allowing a claim for relief in the original computation if you subsequently get less than you are owed.

You know all this of course, but I've enjoyed setting out how it all hangs together nonetheless.

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Replying to Tax Dragon:
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By Hugo Fair
01st Jul 2022 13:00

Wow, as usual you (or specifically the Croner's page you indirectly guided me to via looking up Marren v Ingles) has shown me why tax is often more complicated than it looks.

If I've understood correctly then ...
* Sale of 100% shares of limited company;
* Consideration on offer structured as Initial, Retained and Deferred (say £375k, £75k and £50k) - where Deferred is simply what it says (a 6-month delay), whereas Retained is a shorter duration during which the agreed draft accounts as at Completion date are adjusted if necessary by the new owners (and those adjustments are deducted from or added to the Retained amount when it is paid);
* Initial takes place at end-Feb in one tax year - and both Retained & Deferred therefore take place in the next tax year.

So far so clear - and all subject to CGT/BADR in the earlier tax year?

But it turns out that the SHA also had a term that said, over and above the agreed consideration (all 3 parts as described above), any 'excess cash' (with a complex definition) would be noted as part of the accounts review (the one that leads to payment of the Retained consideration) ... AND that this amount would also be paid to the shareholders (alongside the Retained consideration).

I assumed that this 4th component would need to be treated in the same way as the other 3 (i.e. as at the tax year in which the sale took place) ... but the Croner's article seems to be saying that, as it was not a known amount at the point of sale, it should be treated separately (in the tax year of receipt and thereby utilise the annual allowance again)?

I realise this is treading dangerously closely to the territory of 'advice', but I'd be happy to simply have your thoughts/pointers as to where I should look ... either to illuminate the errors of my thinking or potentially to support my conclusion.

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Replying to Hugo Fair:
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By Tax Dragon
01st Jul 2022 13:42

Your thread hijacking skills make Justin look like an amateur.

Interesting whether the Retained amount is ascertained but contingent (on new owners agreeing the accounts) or unascertained (ooh, with a run-up it turns out I can spell it!) I don't deal with enough of these in the real world to have a conclusion on that - but probably in that real world it makes no odds, as you'd just bring into the computation the amount you actually received.

The 4th payment sounds like it has come from [been funded by] the company you used to own. Is that CGT, caught by TiS - or a for-real distribution?

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Replying to Tax Dragon:
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By Hugo Fair
01st Jul 2022 15:19

I'll take a compliment (however backhanded) any time ... I just observe & learn!

More seriously, you are of course correct that my 'cover' of having "very recently told (not advised) someone" is true but disingenuous - as the someone is my co-ex-shareholder who unfortunately is not at all well.

It's not clear to me (even after the nth read of the SHA) whether the unascertained ('excess cash') sum is part of the Retained consideration OR is a wholly separate item to all the Consideration components.

Without getting too specific (or indeed detailed) the 3 elements of consideration are all described as the original Offer - which could have increased or, more likely decreased, during due diligence (but didn't change due to our immaculate books)!
Whereas the 'excess cash' is defined as a Completion Shortfall or Excess (via reference to the Net Cash Statement and the Working Capital Statement as a means of identifying any need for Adjusted Net Debt ... or in this case the reverse).

So ... the value of the 'excess cash' was forecastable at the point of sale and indeed only increased a bit due to the discovery of a few delivered-but-not-yet-invoiced projects.

I had been intending to include everything as part of the total consideration (hence one tax year, one CGT allowance per shareholder, and all under BADR) ... but am I being over optimistic/simplistic?

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Replying to Hugo Fair:
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By The Dullard
01st Jul 2022 14:17

I think you may misunderstand.

I agree with TD that your 4th component sounds very much like a dividend, or a payment that will get caught under the transactions in securities rules.

However, where you have genuine unascertained deferred consideration it isn't the case that it just gets taxed when it is received.

When the shares are disposed of you value the unascertained deferred consideration (at £X) and £X is part of the consideration for disposal of the shares. BADR may be available.

When the unascertained consideration is later ascertained and paid (amount £Y) you have another gain, being £Y - £X. This won't qualify for BADR because it was never a business asset.

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Replying to The Dullard:
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By Hugo Fair
01st Jul 2022 16:52

Thanks.
I'm about as certain as I ever am on matters of taxation that TiS is not applicable ... the main purpose of the transaction was not to obtain a tax advantage; and the selling shareholders don't retain a significant (or indeed any) interest after the transaction.
It was intended to be an extra amount (based on the excess of cash and cash-like assets over the needed working levels) that could only be calculated accurately after the post-completion accounts had been verified ... that appears to me to be a part of the consideration (which simply couldn't be quantified until after the sale).

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Replying to Hugo Fair:
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By Tax Dragon
02nd Jul 2022 05:29

If excess cash is more than a couple of hundred quid, I find the 'we hadn't thought about the tax' line hard to swallow - why did you not pay it out as a dividend when the buyer said they didn't want the cash in the company going forward? (I might mean did they suggest you could do that? Again, my experience here is not a patch on Dulls's, but often buyers don't want to pay to buy cash. Why were your buyers willing to do so?)

Further (I'm saying this without opening up the TiS legislation... the weekend is here, don't you know!) doesn't the motive test basically examine the transactions now? It's probably misnamed - not looking (or at least not just looking) at seller's intentions but (also) the effect of what happens. The effect is you have turned the dividend the company could have paid pre sale into sale proceeds.

Anyway I'm out on that subject for a couple of days now. Forgive me if, in my Saturday morning laziness, I have mispoken.

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Replying to Tax Dragon:
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By Hugo Fair
02nd Jul 2022 10:10

"Saturday morning laziness" ... if I'd had the energy to even lift a finger at 5:30 am then I'd have saluted you!

FWIW ... 'excess cash' is considerably more than a couple of hundred quid, but the situation wasn't that the buyer "said they didn't want the cash in the company going forward". It was more that their initial offer was lower than what was wanted by me, so I told them that was OK if I extracted the cash first (negotiation ploy). It was then that they introduced the concept of a Shortfall or Excess of Working Capital.

Since negotiation (over the Offer) was before due diligence had even commenced, they were unable or unwilling to disclose at that stage what they deemed to be a suitable target Working Capital ... so the Offer was constructed as an amount of Consideration (in parts as described earlier) + an amount of Completion Shortfall or Excess (for which the methodology of calculation was negotiated during due diligence and incorporated in the eventual SHA).
By the date of completion, there was a draft of the value expected - which when added to the Offer constituted (in my mind) the total consideration.

As it turns out the excess was slightly greater than forecast, but that's the risk that both parties took on having a slightly unknown final purchase price at the point of sale.
[Note in case it's relevant: the variable component wasn't based on post-sale performance - simply on the need for the buyers to get to grips fully with the clients and order-books, and staff and ongoing projects, over the first 2 months of ownership].

So ... to return to your point of 'why were dividends not used to extract cash'?
First and foremost, I couldn't be sure until almost deadline day how much needed to stay in to meet the requirements of the purchasers (i.e. not take us into their definition of a Shortfall of Working Capital, thus triggering some repayment).
As soon as I could see the scale emerging, I did (with shareholder approval) pay out (through normal PAYE channels) some substantial bonuses to staff - with the twin objectives of reducing the cash hoard to close to the buyer's stated needs and rewarding long-serving staff.

[Background: look away now if you're a tax adviser with a nervous disposition, but we never used to declare dividends anyway - just like we never borrowed money (from the bank or external investors or whatever).
My guiding-light has always been Mr. Micawber - partly no doubt because he was my favourite in one of the first books I read in English, but also no doubt because I'm a control freak and so like to keep things simple even if less 'efficient'].

I guess the bottom-line is ... whilst you are correct to say that one interpretation is I've "turned the dividend the company could have paid pre sale into sale proceeds" - it wasn't the determinant for how the deal was constructed.

I'm sure that the above constitutes 'too much info' but I'm not a natural maintainer of secrecy.

Anyway, enjoy your weekend (hopefully with some rest) ... I'm off to commence shovelling a couple of tonnes of gravel (because labourers don't work at weekends apparently)!

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Replying to Hugo Fair:
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By Tax Dragon
05th Jul 2022 10:08

Hugo, I suspect new s686 (as invoked by s684) means that TiS is not applicable. It looks like old s686 may have examined motive, but it's been replaced by something much easier to understand and measure - ownership.

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