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Capital Gains implications of unusual agreement

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We have a client who sold the shares of his company for £200,000, the client and buyer have entered into an agreement whereby rather than pay the full £200,000 now the buyer will pay £1000 per month until the payment has completed. I believe in a circumstance like this our client can contact HMRC and apply to have the capital gains payments split up over the coming years.

A problem arises however because our client has signed a declaration of solvency prepared by a solicitor whereby it states that he sold his shares to a limited company for £1.00 and at the same time entered into a loan agreement with an individual for the £200,000. The deal was structured this way because the buyer could not obtain full funding from the bank.

If he were to apply to HMRC to have CGT payments spread out (under Section 280TCGA1992) they will ask for paperwork relating to the sale being the declaration of solvency but not the loan agreement.

What do I do?

Replies (16)

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Hallerud at Easter
By DJKL
28th Jul 2020 14:19

Surely he did not sell his shares for £1, he sold them for £200,001, of which he got paid £1, company owes him £200,000 and the individual has in effect guaranteed performance and is performing the purchaser's obligation, or am I not understanding the question?

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By Anonymous.
28th Jul 2020 15:31

Gert wrote:

A problem arises however because our client has signed a declaration of solvency prepared by a solicitor whereby it states that he sold his shares to a limited company for £1.00 and at the same time entered into a loan agreement with an individual for the £200,000. The deal was structured this way because the buyer could not obtain full funding from the bank.

Not my area but that rather smells like fraud! A false statement being used to obtain bank finance?!

What did the share sale agreement say?

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Replying to Anonymous.:
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By Tax Dragon
28th Jul 2020 15:52

Not sure it's fraud so much as stupidity. (My shares are worth £200k, you have only £1, so why don't pay me the £200k [interest free?] over a period that approaches 20 years... seriously?)

But, like you and DJKL, I haven't managed to put the question together in a way that makes enough sense to comment on. And my synopsis is likely wrong.

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Replying to Tax Dragon:
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By Anonymous.
28th Jul 2020 16:13

Tax Dragon wrote:

Not sure it's fraud so much as stupidity. (My shares are worth £200k, you have only £1, so why don't pay me the £200k [interest free?] over a period that approaches 20 years... seriously?)

But, like you and DJKL, I haven't managed to put the question together in a way that makes enough sense to comment on. And my synopsis is likely wrong.

Yes, definitely a subsidiary issue to the question why someone would elect to sell a business and be paid over 200 months! Can't afford to pay me now but is a good credit risk for 17 years! Interesting!

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Psycho
By Wilson Philips
28th Jul 2020 16:30

Go back to the solicitor and tell him to sort it out.

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Replying to Wilson Philips:
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By paul.benny
28th Jul 2020 16:42

Absolutely.

Whilst we don't know what advice the solicitor gave, you would hope that they pointed out the risks involved in such a long payment period, the apparent lack of any security for the seller - and advised the client against it.

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Replying to paul.benny:
Psycho
By Wilson Philips
28th Jul 2020 16:52

My concern is that the solicitor drafted a document that states that the shares were sold for £1 when that clearly is not what happened.

But - to the OP - I'm not sure why HMRC would be interested in the solvency statement (if in fact they were to ask for anything). Surely the SPA indicates the consideration payable and the terms?

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By Montrose
28th Jul 2020 16:56

Something is wrong here.
If there was a deferred consideration that must have been documented. That document - which sets out the legal relationship between your client and the purchaser -has apparently been ignored by the solicitor seeking to help his and your client to show he was solvent.

Tax seems to be the least of your client's problems if , as appears to be the case, he is going to swear an incorrect Declaration of Solvency- or has already done so.

His tax status is unaffected by an incorerect Declaration of Solvency.

HMRC will be realistic where a Document does not represent the true facts

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By thestudyman
29th Jul 2020 10:22

Deferred consideration is still consideration. The shares were not sold for £1

What a car crash of a situation. Why would any seller be prepared to accept money of their asset over 15-20, years, I can imagine the possibility of default would be high.

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Replying to thestudyman:
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By Tax Dragon
29th Jul 2020 10:53

I'm really not convinced there is deferred consideration. It's not right to guess what's going on but without either the paperwork or any comeback from the OP, that (or, the more sensible approach, ignore the thread) are the only options available.

We are told that the sale is to a company and the loan is to an individual. So what more is the company going to pay our vendor? Nothing. So what part of the consideration has been deferred? None. So (I guess) CGT on the full £200,001 in year 1.

See, the loan with the individual is (arguably at least) a distinct transaction. (Potentially, highly tax inefficient, depending on quite what has happened. Which it seems with this OP we will never know.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
29th Jul 2020 11:46

It's the declaration of solvency that is confusing matters. The darn thing should be torn up and the solicitors asked to get their act together and draw up a document that reflects the facts (whatever those facts may be - only the OP and his client will know for sure, although even that is doubtful).

I agree with your analysis, though - on the basis that the substance is that the shares were sold for £200,000 (or £200,001) and the £200,000 immediately lent to the individual mentioned.

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Replying to Wilson Philips:
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By Tax Dragon
29th Jul 2020 11:55

And if that's right, it's bye-bye to any tax relief [under s48 (or is it 49? I never remember!) or otherwise] should the £200,000 not be 'recovered'.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
29th Jul 2020 12:10

It's a big 'if' but, yep, ouch (potentially).

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By Paul Crowley
29th Jul 2020 11:54

What does the contract for sale say? Who bought the shares? What was the point of the extra holding company being inserted and why was the holding company in need of a solvency certificate?
Why was your client involved in the holding company?
Has your client received any loan money yet?
Who was the solicitor acting for?

Get a different solicitor to review the documents and ask him whether your client has sold for £1

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Replying to Paul Crowley:
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By Tax Dragon
29th Jul 2020 12:02

Paul Crowley wrote:

Who bought the shares?

Key question.

That we have to ask... I'm out. OPs like this should be blocked.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
29th Jul 2020 12:12

"What do I do?"

For starters, provide the additional information requested.

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