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Can I pay cgt?

Ltd company clients moved to my new sole trader firm under a direct marketing campaign

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Hi and thanks for taking a look at my question.

I own a LTD IFA firm, (LTD).  I joined a new financial firm(CF) as a sole trader and they offered to buy any clients I could get under my new sole trader firm after 1 yr.

I invited clients from my LTD company firm, to join  me, along with their spouses, family and friends etc.

I estimate 50% of those clients accepted a direct marketing offer to join me in my new sole trader firm with CF.

When the time comes to sell those clients to the new financial firm, CF, they will pay me 8% of their total value, approx 3 million.

But the new contract is with me as a sole trader. My LTD IFA firms clients are free to come and go as they please and can choose any adviser they want.

If my LTD company, wanted to sell those clients as a going concern, in which case they would be classed as goodwill, I would need to novate them from my ltd firm, to the new buying firm,CF, or any new firm who wanted to buy them, but this never happened. The clients that joined me in my new venture, did so under their own steam.

Once the clients are sold, the sole trader firm will close.  As I understand it, selling a sole trader practice after 2 years can get some relief for some of the money to 10% CGT.  This won’t affect me, so the rate I would pay would be 20% CGT.

So the question is, and I have had a few opinions, after 1 yr as self employed agent of CF and selling the clients to the new company, CF, will this be classed as cgt tax? Or can HMRC deem the clients to be goodwill assets from my LTD firm?

Thanks

*This question has been edited with additional amends.*

Replies (21)

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By Paul Crowley
08th Jun 2021 06:22

I think the the two equal shareholders need to take legal advice.
Fiduciary duties and all that.

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By Tax Dragon
08th Jun 2021 06:51

Paul refers to the legal position - this seems relevant to the tax treatment. And I can well imagine HMRC having a sniff around numbers of this size and finding the tax charges that you are hoping to evoid.

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By Tax Dragon
08th Jun 2021 07:13

Thinking about it, could this not have been done in a (legitimately) much more tax efficient way, even than your botched attempt at CGT will give you if it works? Why did you not take (pay for) bespoke advice beforehand, rather than doing this then obtaining various "opinions" (from whom, may I ask?)?

I've come back to your question because I thought it the only one of interest on here this morning, but on reflection I'm not sure I can believe you'd be so stupid as to have done what you say you've done.

But anyway, this forum is not a place for individuals to obtain reliable personal tax advice. And right now that's what you need.

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Psycho
By Wilson Philips
08th Jun 2021 07:34

I think some clarification on the arrangements might be in order - how exactly does one “join a firm as a sole trader”?

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By leeanthonyblackshaw
08th Jun 2021 07:54

I know of at least two others selling to TP who also have not taken proper tax and legal advice but seek informal views to back up what TP have told them.

Would you expect your clients to enter into a large financial transaction in such a way?

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By Harryspotter
08th Jun 2021 09:07

Thanks for your replies. Tp are a financial firm and I joined them as a sales agent in a self employed basis.

They had everything mapped out with contracts and I did get the contracts checked to ensure they worked, however, it was more the legal nature of them paying me than the tax nature as they made it fairly clear they would pay me, self employed mk, rather than my LTD firm.

I talked to a tax advisor yesterday and he couldn't see how HMRC could view this any other was than me selling clients through my self employed firm. I argued that HMRC might view it as my LTD firm passing goodwill assets to me personally. He felt that if goodwill existed in the LTD firm, they would not have drifted to my new self employed firm with TP. He did suggest getting a legal view too. But, he was very confident that me sending direct offers to my LTD clients to join me in my new venture could not be argued any other way.

The reason for posting my dilemma is just to see some different views and or if anyone had experience in this area.

If I'm honest, when I started this process, I never anticipated the numbers to get so large, which is why I never took specific advice beforehand. If I had a do over, of course I would.

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Replying to Harryspotter:
By Duggimon
08th Jun 2021 09:20

Harryspotter wrote:

If I'm honest, when I started this process, I never anticipated the numbers to get so large, which is why I never took specific advice beforehand. If I had a do over, of course I would.

Perhaps you should do it now?

Indeed, it sounds like you already have, but if you don't like your tax adviser's perspective, perhaps keep searching for one who takes whatever view it is you've already decided you want them to take.

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Replying to Duggimon:
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By Harryspotter
08th Jun 2021 11:23

I am trying to - the issue is this

TP say one thing, my accountant says another and the Tax advisor agrees with TP. I have reached out to some tax lawyers, but waiting for calls.

Most of the time, everything I do is very straightforward. This seems not so, which again is why I'm interested in reasons why one side would be right and another have a differing opinion.

I know what will happen - The 2 tax lawyers will disagree with each other and I will be back at square one.

In my mind, that of TP and the Tax advisor, the clients fled with me to my new firm, the goodwill of my Ltd firm was not there - it was with me as an individual. TP will buy my new client bank. CGT paid on the sale.

That makes sense to me. What am I missing?

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Replying to Harryspotter:
Psycho
By Wilson Philips
08th Jun 2021 11:49

I would tend to agree with that analysis. Although clients may have been dealing with your limited company presumably it was because of the service provided by you as an individual and not because of any purported goodwill in the name of the company. As such, the goodwill is personal (turning it round the other way, if you had incorporated from a sole trade to a limited company and tried to create a large director's loan balance from a transfer of goodwill, I suspect that HMRC might have raised a challenge).

A counter to that is that if you would have been unable to sell what is personal goodwill to your own new company, how are you able to sell it to anyone else? In other words, I'm not convinved that we know exactly what this payment is for.

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Replying to Wilson Philips:
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By Harryspotter
08th Jun 2021 13:04

Thanks for your reply. there are many firms out there buying up smaller IFA client banks. They do not want to buy the firm as they don't want to get caught up in liabilities.

There must be reasons why the new firm does this -
A few could be -
They don't have to get embroiled in an advice process
They don't have to get involved with novation
Having me in their "camp" provides a seamless transition for clients.

What is clear, they only do this by me creating a new "brand" under their umbrella. Whether that is a new self employed role or a new LTD role, it didn't matter, but their contract is with me, not my LTD firm.

At the end of everything, the new compliance firm will have new clients to service. This is why they are willing to pay for them.

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Replying to Harryspotter:
paddle steamer
By DJKL
08th Jun 2021 11:58

All the pre arranged steps , the contract with TB including the buyout arrangements entered into presumably at the outset would certainly make me nervous. You give no background as to how many years you traded via the company nor why TB would not acquire the client base direct from your company rather than make you set up as a sole trader for a year? Why a year?

What I would be doing is ensuring I went to a big enough firm awash with CTAs as well as CAs with full details documented for them to base their advice upon, if your current tax adviser is of that ilk then fair enough, if not that is what I would want and I would also want a very clear written report from said firm re any dangers they perceived re where tax liabilities might rest.

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Replying to Harryspotter:
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By Hugo Fair
08th Jun 2021 11:33

Tullett Prebon, if that's who tp are, are a FTSE 250 member with annual revenues approaching £2bn ... so it was always likely that they had the legal side covered (and have the requisite clout should disagreement arise).
So the lesson to take for the future should be to get proper accounting advice (which includes the potential taxation issues) BEFORE setting off down the road of a new business.
It may be a gamble with upfront costs but, although you can always direct a river before it starts flowing, it gets severely harder to change direction thereafter.

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RLI
By lionofludesch
08th Jun 2021 15:06

Does £2.8m not seem a lot to be asking questions on an internet forum?

Just a thought .......

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By Tax Dragon
08th Jun 2021 15:43

An alternative view - following the logic of your tax advisor - is that you are not selling goodwill. As Wilson says, how could you? As I wonder, why would you do so (if you could) for just 8% of the value?

Instead what you have is a receipt of your sole trade, taxable and NI-able as income. And that's even if your tax advisor is correct about the asset-strip of your company, about which you say you have had mixed opinions.

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Replying to Tax Dragon:
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By Hugo Fair
08th Jun 2021 16:19

I suspect 'value' in this context refers to value of client holdings (not value of or to the business)? Basically, it sounds like a way to 'pre-sell' commissions due-but-not-yet-invoiced (a bit like factoring but before the invoices have arisen).
Of course, not being an IFA or operating in that cutthroat world, I could be wrong!

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Replying to Hugo Fair:
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By Tax Dragon
08th Jun 2021 17:13

If so, £2.8m suddenly sounds like a very small number.

But getting the tax right on £224k is clearly something that has to be done. Which means someone looking at the paperwork - not something that can happen here.

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Replying to Tax Dragon:
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By Hugo Fair
08th Jun 2021 17:21

Well my 'interpretation' is only supposition ... whereas your conclusion is spot on (of course) either way.

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By Harryspotter
08th Jun 2021 17:29

So the 3 million figure, let's say for ease, is the figure paid to me for the sale of the client bank to the new compliance firm.

If I joined the new CF firm with no clients as a self employed agent. Built up a big client bank over a 1 yr period, using paid advertising etc and then the new CF firm bought my client bank from me for 3 million. Would this be classed as CGT or income tax?
As I see it, I am selling up and closing the self employed firm.

If it is CGT - Then the only difference is how I acquired the clients for my new self employed firm. I asked clients from my old firm if they wanted to join me in my new venture. 50% did and 50% didn't.

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Replying to Harryspotter:
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By leeanthonyblackshaw
08th Jun 2021 18:52

The danger is what could have been structured, with tax and legal advice in advance, as a CGT sale of your business might now be income tax commission for introducing clients to your new firm. But, without sight of the contract, it isn’t possible to know.

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Replying to leeanthonyblackshaw:
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By Harryspotter
08th Jun 2021 20:07

Thanks. All I have received so far is a loan payment. I haven't called the option yet, although I plan to do this within 2 months.

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Replying to Harryspotter:
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By Tax Dragon
09th Jun 2021 06:48

Where leeanthonyblackshaw mentions "the danger", I would have said "one of the dangers".

Others include a tax charge on the transfer of clients from the company to you. This doesn't sound like part of the standard paperwork so there won't be a reliable view from the payer. Just suppose I was an employee of your company. Suppose I had written to your clients to say I was setting up on the side, come with me. Would you just have shrugged and said "fair play"? Or, put another way, what stops you doing exactly that the day after you've had your payout? I would venture that there is an answer and that answer is (or refers to) the legal position. I would refer you back to Paul's opening response (and my first comment).

Another danger is that you haven't told us the truth, the whole truth and nothing but the truth. You haven't mentioned loan payments or options until now. Also, in one post you are joining as a sole trader and in the next you are ceasing and selling up (and presumably joining as an employee... which would bring a further set of taxing provisions and more "dangers" into play).

Seriously mate, how do you expect any solid advice to be constructed in here when the sand being built on keeps shifting?

That said, I am interested in the answer(s), so would you mind posting back once you obtain a dependable opinion? (If that sounds forward of me, all I'm really doing is asking your question back at you - surely that's allowed, John?)

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