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Cheap purchase of loan

Taxable when repaid?

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My client is buying the subsidiary of a holdco. Sale price of the shares is £100k, however my client is paying another £100k to holdco to buy the £3m sat as a creditor on subsid’s Balance Sheet. 

If the target company (current balance sheet = (£2.5m)) is turned around and manages to repay the £3m loan, am I right in thinking that the ‘gain’ of £2.9m isn’t taxable, or would it attract CGT?  

 

Thanks 

Replies (25)

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By Accountant A
30th Oct 2018 17:41

I think I can rule out the "‘gain’ of £2.9m isn’t taxable" option. Beyond that, I'm not sure.

One wonders if there is a tax efficient way of structuring the whole transaction. Sadly, my technical knowledge is woefully inadequate.

Thanks (1)
Replying to Accountant A:
ALISK
By atleastisoundknowledgable...
30th Oct 2018 17:47

Alas, my technical knowledge falls into the same category as yours ... I thought I was probably being a bit hopeful with the non-taxable bit, but it would be good for one of the taxperts on here to give me a definitive answer / pointed / link.

Client’s current thinking is that his holdco will buy the shares & he personally will buy the loan.

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Replying to Accountant A:
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By Justin Bryant
31st Oct 2018 09:58

On the contrary, assuming the client is a human (so it's not a LR) then there is almost certainly no CGT per the link below, but you need to then consider IT (re badges of trade & sweep up provisions etc.):

https://www.taxinsider.co.uk/1512-Thats_A_Relief_Debts_And_CGT.html

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Replying to Justin Bryant:
By Ruddles
31st Oct 2018 10:18

Can you clarify the basis on which you reached that conclusion?

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Replying to Ruddles:
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By Justin Bryant
31st Oct 2018 10:43

Any competent tax adviser knows that such debts gains by humans are mostly outside the scope of CGT (the unlikely exception is if they are a debt on a security or a non-QCB and there have been plenty of schemes over the years to try exploit that). Have a look at TCGA 1992 or a basic CGT text book if you don't believe me.

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Replying to Justin Bryant:
By Ruddles
31st Oct 2018 10:44

On the basis that I am an incompetent tax adviser, kindly point me to the legislation and the part of the article that you linked to which says that a gain on disposal of such a debt is not chargeable to CGT.

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Replying to Justin Bryant:
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By Portia Nina Levin
31st Oct 2018 10:58

Come on Justin, tell us all exactly what TCGA 1992 and the basic CGT text book says about when debts are outside the scope of CGT.

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By Ruddles
30th Oct 2018 18:05

I vote non-taxable, the flip side being that holdco will get no relief for the loss.

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Replying to Ruddles:
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By atleastisoundknowledgable...
30th Oct 2018 18:13

Thanks :)

No relief is the sellers problem! (Thinks it’s a BVI, but might be wrong)

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Replying to atleastisoundknowledgable...:
By Ruddles
30th Oct 2018 18:28

Having read the additional information in the post preceding mine I’ve changed my mind. Taxable (CGT)

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Replying to Ruddles:
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By atleastisoundknowledgable...
30th Oct 2018 18:44

The selling holdco is the BVI. The target company is a uk Ltd, as is my client’s holdco.

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Replying to atleastisoundknowledgable...:
By Ruddles
30th Oct 2018 18:51

Doesn't change my (revised) opinion

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Replying to Ruddles:
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By atleastisoundknowledgable...
30th Oct 2018 19:07

What did change you from non- to CGT?

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Replying to atleastisoundknowledgable...:
By Ruddles
30th Oct 2018 19:56

I had missed the point that the individual, and not the company, is to acquire the debt.

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Replying to Ruddles:
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By atleastisoundknowledgable...
30th Oct 2018 20:40

Are you meaning to imply that if the (uk holdco) company was to acquire the debt, the ‘gain’ wouldn’t be taxable?

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Replying to atleastisoundknowledgable...:
By Ruddles
30th Oct 2018 21:34

That’s a distinct possibility, but you’d need to check the loan relationships legislation.

There may well be a charge in the target - see s361 and thereabouts.

Thanks (1)
Hallerud at Easter
By DJKL
30th Oct 2018 23:47

Flagged thread re loan losses.

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By Marion Hayes
31st Oct 2018 10:33

Sorry to sound confused - but I am.
First step surely is to clarify who is selling what to who.
What type of entity is your client.
Who is the creditor and is it/will it be connected to your client, before or after the sale.
1. Holdco is selling shares in subsidiary to your client for £100k while still owing £3m, or not owing £3m?

How can holdco sell the creditor, either before or after the sale of the shares, unless it is the creditor itself i.e. intergroup loan .

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Replying to Marion Hayes:
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By atleastisoundknowledgable...
31st Oct 2018 10:53

Subsid owes current holdco (H1) £3m.
H1 will sell the shares in S for £100k to my client's holdco, H2.

At the same time, the £3m loan due to H1 from S will be sold for £100k to either H2 or the (person) client. H1 and H2 are not connected.

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Replying to atleastisoundknowledgable...:
By Ruddles
31st Oct 2018 11:01

In which case, the 'gain' on repayment of the loan, if that ever happens, is IMO likely to be taxable in either case. Justin disagrees but has so far failed to explain why.

If H2 acquires the debt, then there are potential exclusions, but not enough information to establish whether they would apply.

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Replying to Ruddles:
By pridgway
05th Nov 2018 17:24

You're right. Section 251 says no gain on the disposal by original creditor unless it's a debt on a security. If it's not the original creditor then there is a gain as it is an asset. Only exception would be where you're acquiring on trading account.

But I think you knew that :)

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ALISK
By atleastisoundknowledgable...
31st Oct 2018 11:23

BREAKING NEWS

Vendor has decided that the loans are to be written-off prior to the sale, which will leave subsid with a large tax loss c/fwd (s358) yet positive reserves, which is great.

So everyone's time has been wasted, but thank you away/once more.

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Replying to atleastisoundknowledgable...:
By Ruddles
01st Nov 2018 12:00

Darn it - now Justin has no reason to try and explain his position. I will take his silence as acknowledgement that he is perhaps not as competent a tax adviser as he thinks.

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Replying to Ruddles:
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By Tax Dragon
01st Nov 2018 07:03

This one was farcical, even by Justin's standards. I look forward to his contributions to the upcoming MCINOCOT thread.

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Replying to atleastisoundknowledgable...:
Hallerud at Easter
By DJKL
01st Nov 2018 10:56

Boo, we want more, we want more!!

I flagged this thread as at some time post April next year I am going to have to work out what I am doing with some loans made to a Limited company of ours (corporate and individual loans) that is soon to be no more (wind up starting this month) and where the loans will not be repaid.(no money but at least no third party creditors)

They are interesting as the directors' loans to the company were partially made up by lending it money but also were in part acquired by purchasing, at below par value, loans from two other former directors/shareholders and a bank.

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