I have a client working in IT and they have a fee base of customers paying a monthly standing order for IT services that can be called upon.
The client is a small Ltd company owned and operated by a lady with her husband as a 2nd director.
My client has been approached by another IT company wishing to purchase her client list and fee base but NOT the Ltd company (the shareholding) and this fits in with her vision as she is now ready to retire from the busy working life and concentrate on other things (like hobbies etc.).
The question is what would be the tax implications to this? On first thought, CGT route may be appropriate but would she also be elegible for Entrepreneurs Relief? However, on doing some research, it would appear that the sale would have to go through the Ltd company and therefore chargeable to CT but then when she extracts those funds (sells back shareholding) she will then be subject to income tax on the proceeds - effectively being taxed twice for the same transaction.
Is this correct or is there an alternative way that I have not seen?
Thanks
Replies (17)
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Your second thought is correct, though they can perhaps do an MVL shortly after sale to then get CGT...but this would be after CT already suffered on the lion's share of the sale proceeds. Their situation is a fairly typical "buy the shares or the trade and assets" question.
Generally speaking the buyer will want to buy the trade and assets. Tax reasons for this, plus tidiness (they don't then have a separate Ltd Co to dispose of), plus reduces risk of them inadvertently inheriting skeletons in the closet.
Generally speaking the seller will want to sell the shares. Tax reasons, plus finality (ie don't then have hassle of closing the shell of a company).
You may end up with a two tier price, eg where offer for trade and assets is maybe 20% higher than offer for shares.
You can do it, but it is not as simple as that. The company can't just hand over demonstrably valuable assets.
Market Value issues.
( The £1 BHS price tag came with a fair few financial obligations to be met)
I may be wrong, but wasn’t Lady(?) Green the sole shareholder and as a citizen of Monaco not liaible to UK IT on the dividends?
I do recall that she certainly had a significant holding but would not, given current news , wish to comment on any holding Sir Phillip may or may not have enjoyed.
I may be wrong, but wasn’t Lady(?) Green the sole shareholder and as a citizen of Monaco not liaible to UK IT on the dividends?
Your best option is likely to pass your client on to another professional who has more regular dealings with this sort of thing.
Your comment about Philip Green is the sort of thing the man from down the pub would say to justify his latest brainwave so best pass this on and not open yourself up to a PI claim.
BHS was in trouble. Even ignoring the other complications, it was not a valuable asset. Philip Green was still investigated as to whether the price was justifiable.No, but the company could sell to the sole trader for a notional amount? Afterall, didn't Philip Green sell BHS for £1?
That is not the position your client is in. You are leading them into a world of hurt if you tell them selling for a nominal amount is a valid route.
Its not really being taxed 'again' though is it?
Do you class her sales income as being taxed 'again' when she draws her profits as dividends?
The company makes a transaction on which it is taxed. Then if funds are paid to the shareholders that is a separate transaction subject to tax also.
It isn't good to explain a client that they are being taxed 'twice'.
But exit was one of the parameters that the client (and her agent) ought to have considered when creating the company in the first place.
The advantage of say a lower rate of CT than IT plus NI over the years maybe also needs balanced here against the cost, plus limited liability for x years.
This is why taking full notes re client aspirations and future wishes/plans is so imperative before placing them into the construct of a limited company or any other vehicle and why the first accountant to invent a 100% reliable crystal ball will never be short of clients.
You can basically steal the clients from the company for nothing in the real world, but in the tax world there will be a deemed MV disposal under s 17 and/or 18 TCGA 1992 (and it may also be treated as a distribution).