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CGT following acquisition & sale. Second opinion.

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I'm looking for a second opinion on a CGT position following an aquisition then later disposal. I received legal advice on this at the time, but I am no longer engaged with the firm that undertook this. 

  • Company A was a startup founded by me (80% ownership). No investment. No revenue, but developed IP with commercial value.
  • Company B is another startup, had raised ~500k seed funding. It had minimal but growing revenue, but was still loss making at the time.

Aquisition (tax year 16/17):

  • Company B raises further equity finance at a £8M valuation (~£23 per share).
  • On the same day, Company A was acquired by Company B, and I join Company B as an employee. As consideration I received ~10k shares in Company B, and options (from an EMI pool) on a further 6k to vest over 4 years (4.5% combined). No cash. Company B acquired 100% of my holdings in Company A. 
  • At the time, the valuation agreed with HMRC for the EMI pool was 0.01 per share (presumably as the company was loss making).

For tax purposes the valuation of my new stock in Company B has been treated as 0.01, not the £23 the investors paid to acquire their stock on the same day. Is this correct? It's not clear to me which valuation should be used when determining tax liability. Is there a choice? Could I have paid a dry CGT charge from the acquisition at that point (with the benefits of ER) and in effect crystalised those gains for better treatment when I later dispose of them?

Disposal

  • After 2.5 years (18/19) I sold my shareholdings in Company B to an investor for ~£1.2m. I paid CGT at 20% (minus costs, and further relief from charity and pension contributions) on the total sale price (minus the negligible 0.01 per share).
  • I left Company B and exercise my EMI options (granting ~4.5k further shares).

I am in the process of disposing my outstanding shares from the EMI pool for a further ~£1m this tax year (20/21). I am outside of the 90 days since I left, so my understanding is there is no EMI relief. I am again expecting to pay CGT at 20% minus some minor relief for charity & pension.

Does this all look sane? The numbers are large enough that if there are any questionmarks I should just engage with another firm. Given that I've had some eyes on this already, I'm not sure if its a) worth it for a further assesment, or b) which I would need of either an accounting or a law firm (or both?).

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By Youareatit
15th Oct 2020 22:20

Morglum wrote:

I'm looking for a second opinion on a CGT position following an aquisition then later disposal. I received legal advice on this at the time, but I am no longer engaged with the firm that undertook this. 

Company A was a startup founded by me (80% ownership). No investment. No revenue, but developed IP with commercial value.Company B is another startup, had raised ~500k seed funding. It had minimal but growing revenue, but was still loss making at the time.

Aquisition (tax year 16/17):

Company B raises further equity finance at a £8M valuation (~£23 per share).On the same day, Company A was acquired by Company B, and I join Company B as an employee. As consideration I received ~10k shares in Company B, and options (from an EMI pool) on a further 6k to vest over 4 years (4.5% combined). No cash. Company B acquired 100% of my holdings in Company A. At the time, the valuation agreed with HMRC for the EMI pool was 0.01 per share (presumably as the company was loss making).

For tax purposes the valuation of my new stock in Company B has been treated as 0.01, not the £23 the investors paid to acquire their stock on the same day. Is this correct? It's not clear to me which valuation should be used when determining tax liability. Is there a choice? Could I have paid a dry CGT charge from the acquisition at that point (with the benefits of ER) and in effect crystalised those gains for better treatment when I later dispose of them?

Disposal

After 2.5 years (18/19) I sold my shareholdings in Company B to an investor for ~£1.2m. I paid CGT at 20% (minus costs, and further relief from charity and pension contributions) on the total sale price (minus the negligible 0.01 per share).I left Company B and exercise my EMI options (granting ~4.5k further shares).

I am in the process of disposing my outstanding shares from the EMI pool for a further ~£1m this tax year (20/21). I am outside of the 90 days since I left, so my understanding is there is no EMI relief. I am again expecting to pay CGT at 20% minus some minor relief for charity & pension.

Does this all look sane? The numbers are large enough that if there are any questionmarks I should just engage with another firm. Given that I've had some eyes on this already, I'm not sure if its a) worth it for a further assesment, or b) which I would need of either an accounting or a law firm (or both?).

https://www.accountingweb.co.uk/about-accountingweb

Want a second opinion, pay for a second opinion. Especially when the numbers are so large.

Or you could just rely on someone similar to yourself, ie an interloper on this forum, a know nothing bod, responding to you, telling you a whole load of twaddle.

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Replying to Youareatit:
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By Morglum
16th Oct 2020 00:14

Youareatit wrote:

Want a second opinion, pay for a second opinion. Especially when the numbers are so large.

Or you could just rely on someone similar to yourself, ie an interloper on this forum, a know nothing bod, responding to you, telling you a whole load of twaddle.

Sure, and I'm more than happy to pay for a second opinion, but as I (perhaps not clearly enough?) alluded to, I'm not entirely sure where I should go for that opinion.

Do I need an accounting firm? A legal firm? A firm that combines both? Do I need a firm that specialises in investments / acquisitions or would any accountant worth their salt be familiar with the reliefs available and how they should be structured? I want someone to dive in and understand my tax situation, see where there are potential savings to be made, and to be able to make suggestions of where I could improve it. Is what I actually want a hybrid of accountant & financial advisor? As a (semi-)layperson it's quite difficult to judge from the outside. You don't know what you don't know.

Historically, for my personal and other small businesses I've been able to get by with a combination of TaxCalc, the judicious use of this forum, and a small accounting firm to sanity check and rubber stamp my efforts. Sadly they have been unable to support me as the needs became more complex.

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Replying to Morglum:
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By Paul Crowley
16th Oct 2020 00:52

Well if they just rubber stamp, then maybe not the best choice.
The skills are separated for a good reason. A good accountant knows when to suggest getting the different skills and professions involved.
Get a good accountant, and he will be add value.

The rubber stamp comment suggests that you hold a low opinion either of your prior accountant or just the profession in its entirety

You appear to suggest that legal advice is what you took. Did not discuss with the rubber stampers?

If I posted on a medical forum, I doubt that I would call my GP a quack

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Replying to Paul Crowley:
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By Morglum
16th Oct 2020 01:47

At the risk of drifting further off the original topic here...

Paul Crowley wrote:

The rubber stamp comment suggests that you hold a low opinion either of your prior accountant or just the profession in its entirety

No, no. There's been a bit of misunderstanding if that's how it's come across. For the avoidance of doubt, I merely meant that my previous accounting requirements were simple enough that I could largely manage them on my own, but that I also had a firm engaged to double check my position at the end of each year. Perhaps "QA" would have been a better phrase than "rubber stamp". The firm did exactly as we agreed, and I was happy with the service provided.

Paul Crowley wrote:

You appear to suggest that legal advice is what you took. Did not discuss with the rubber stampers?

I did indeed engage a law firm. Legal advice was always going to be a needed as part of the acquisition - there was a reasonably lengthy Share Purchase Agreement. I am however no longer engaged with this firm on this matter due a conflict of interest. Unfortunately for me they also happened to represent one of the venture capital firms who bought in at later funding round.

I have discussed my position with my current accountants, but they, including by their own admission, are not experts in this area.

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Replying to Morglum:
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By Youareatit
16th Oct 2020 06:50

Perhaps you should drop a chunk of cash to a destitute accountants society for the freebies you have had from here.

Sadly your Accountants are letting you down. Regardless of what you think. It might not be their area, but they should know what direction to point you in.

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By Matrix
16th Oct 2020 06:01
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Replying to Matrix:
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By Morglum
19th Oct 2020 21:18

Thanks for this. I have reached out to a few from the last link that look promising.

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By Tax Dragon
16th Oct 2020 07:51

Despite a detailed OP, there are of course gaps in the info you have provided. I'm assuming, for example, that you had no link to B before it acquired 80% of A. And of course you have provided no paperwork to look at. And despite reading it twice (someone kindly copied it all), I don't actually know what you're asking.

I also am not convinced that what you've told us agrees with the paperwork. For example, you talk as if the EMI options were given as consideration for your shares. I haven't checked the rules for a while, but I wonder whether that can be right.

FWIW, the only way I can see you reducing the gain is by paying more in income tax (on ERS). You haven't explained the advice you received about ERS. In fact, you haven't explained the advice you received at all. So, no, I don't see how anyone can provide a second opinion on that basis.

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