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CGT on disposable of shares

Deferred consideration

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I have a client Mr X who is about to sell his 100% shareholding in A (sole director) to co B in which he is a director and 40% (largest) shareholder. X will continue as director of A and run it. 

The sale will be c£1m of which £250k paid up front then 10% of turnover until the £1m is hit, which is expected to be about 9 months. (I'm happy that this is a fair value for the company). The sale however will be slightly short of the 2yr threshold for ER. I had thought of having the agreement so there were large pension contributions and a lower sale price, but he has used his current and previous pension limits. 
 

My question hd been more general than this ... what happens re the CGT liability with deferred consideration? Will he have to pay the entire CGT now despite only receiving 25% of the cash?

Is there anything that I can suggest to reduce what will be a large CGT bill? He has a long term girlfriend but is unmarried so no inter-spouse transfer available. 
 

Thanks. 

Replies (25)

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By David Ex
23rd Sep 2021 15:24

atleastisoundknowledgable... wrote:

Will he have to pay the entire CGT now despite only receiving 25% of the cash?

If he has zero base cost and a £1m gain and is eligible for ER (BADR?), is that not a CGT liability of 10% = £100,000? He’s getting £250,000 cash. Or am I completely missing something??

EDIT: Apparently I am missing something. Reread “The sale however will be slightly short of the 2yr threshold for ER” so no relief available? Any reason why the sale had to be completed with such alacrity?

Still struggling to see why he won’t have the cash to pay the tax when it’s due, assuming, of course, the deferred consideration is paid.

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Replying to David Ex:
Psycho
By Wilson Philips
23rd Sep 2021 15:29

Same principle applies - he's getting more than enough cash to cover the tax bill. Which means of course that payment by instalments is unlikely to be available.

Not a huge amount of info being given but I'm wondering if TiS has been considered.

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2021 15:33

Surely!

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Replying to David Ex:
ALISK
By atleastisoundknowledgable...
23rd Sep 2021 15:45

You’re right of course - he will have the vast majority of the money by the time the tax is payable. I was over thinking it. Ignore my question.

Back to the general question then. In principle, are the deferred consideration terms irrelevant? Let’s say it was payable over 10 yrs, is the tax point for the whole amount the date of sale, or is there any leeway?

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By The Dullard
23rd Sep 2021 15:25

TCGA 1992, s 48 and s 280 answer your question. See CG14881 and CG14910.

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Replying to The Dullard:
ALISK
By atleastisoundknowledgable...
23rd Sep 2021 15:57

Excellent, thank you

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By The Dullard
23rd Sep 2021 15:28

Are any of the holders of the other 60% of the shares in B connected with Mr X? If so, TCGA 1992, s 37 might also be in point.

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Replying to The Dullard:
ALISK
By atleastisoundknowledgable...
23rd Sep 2021 15:45

No

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By mydoghasfleas
27th Sep 2021 09:49

Has the contract for sale been exchanged? If not is it possible to create a conditional contract, where an obligation on X exists and X should have no problem fulfilling it? As CGT disposal date is the date of exchange of an unconditional contract or the date a conditional contract becomes unconditional, you may be able to shift the sale date to two years for BADR.

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Replying to mydoghasfleas:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 10:24

This I like. I think the investors of B want to see the profits generated in A ASAP and the investment showing on A's BS before the YE of Dec so they'll reject this, but X can always say 'pretty please' and see what happens. (BADR would be April)

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Replying to atleastisoundknowledgable...:
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By More unearned luck
27th Sep 2021 12:51

Have you taken on board Wilson and TD's comments?

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Replying to More unearned luck:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 13:37

Yes, this comment though is about creating a way in which there is the possibility of ER/BADR

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Replying to atleastisoundknowledgable...:
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By Tax Dragon
27th Sep 2021 14:17

How does BADR reduce an income tax charge?

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Replying to Tax Dragon:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 14:22

Eh?
What am I missing? It's been a long day already in my defence ...

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Replying to atleastisoundknowledgable...:
Psycho
By Wilson Philips
27th Sep 2021 14:44

You seem to be missing the point that TiS may well be an issue here. (It might not, but it might be worth canvassing HMRC's thoughts on the transaction.)

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Replying to Wilson Philips:
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By Tax Dragon
27th Sep 2021 15:16

I'm not sure ALISK knows what TiS means.

I don't Suppose you could Consider making the Point more Cleary?

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Replying to Tax Dragon:
Psycho
By Wilson Philips
27th Sep 2021 15:46

:¬)

One thing that is notable by its absence so far is any indication of the purpose of the transaction.

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Replying to Wilson Philips:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 16:02

Wilson Philips wrote:

:¬)

One thing that is notable by its absence so far is any indication of the purpose of the transaction.

B want to acquire A partly to 'refocus' X but mainly because of A's profits and the way that they are created means that A will be able to benefit from reduced CoS. B currently sells it's waste product, but can make far more using A's model & contacts. Using B's waste will be far cheaper for A than buying it in new.

I hope that's not too cryptic - B is a well known company, some people on here may have heard of A as well.

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Replying to Wilson Philips:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 16:08

I've looked at Ross Martin and Gov guidance, I don't think it's an issue. The fact that X goes from 100% direct share holding to 40% indirect is the only thing. X owns 40% of B, but in reality doesn't have the control that one would expect him to have on paper as the largest shareholder. X used to have C Ltd, which was doing ok with potential. Some business partners came along, a deal was done with X dissolving C and B starting up, the partners run the company & the business, the 40% was X's sweetener.

It might be worth mentioning that X doesn't draw any income from A, other than the £2k and £40k pension limits. It's a cash cow with a bulging bank balance.

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Replying to atleastisoundknowledgable...:
Psycho
By Wilson Philips
27th Sep 2021 16:32

If you don't think it's an issue, then no real harm in asking HMRC for clear(y)ance then, is there?

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Replying to Wilson Philips:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 16:44

nope.

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Replying to Wilson Philips:
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By The Dullard
27th Sep 2021 17:04

Clear(y)ance is a waste of time IMO. The OP won't get it.

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Replying to atleastisoundknowledgable...:
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By More unearned luck
27th Sep 2021 17:50

"It might be worth mentioning that X doesn't draw any income from A, other than the £2k and £40k pension limits. It's a cash cow with a bulging bank balance."

But perhaps not in the clearance application.

It seems that the milch cow is extinct or, at least, on the verge thereof. Out competed by the cash cow, which has the highly effective evolutionary advantage of alliteration. If anyone is interested in forming a society for the protection of these now very rare beasts if it is not already too late please indicate your willingness to join. Also if anyone has seen one in the wild in recent years please say when and where.

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By tonyaustin
27th Sep 2021 14:37

Have you considered an option to sell next April when he qualifies for BADR, assuming he remains a director or employee?

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Replying to tonyaustin:
ALISK
By atleastisoundknowledgable...
27th Sep 2021 14:46

tonyaustin wrote:

Have you considered an option to sell next April when he qualifies for BADR, assuming he remains a director or employee?

No, but something to throw into the mix. Maybe with a JV profit share until then to keep the investors happy (ish).

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