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Commerciality of restructure

Can a director and minority shareholder sell their shares to a personal company and benefit from ER

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We have a director shareholder (Mr B) who owns 10% of A Ltd (a private limited company). The remaining 90% of A Ltd is owned by 9 other individuals (each with 10%).

Mr B was an original shareholder and purchased his share at par (say £10). 

Mr B now wants to “bank” Entrepreneur’s relief on his shares, and intends to sell his shares to his own Ltd company (B Ltd), which he owns 100% of. B Ltd would purchase his entire shareholding of A Ltd (at full market rate), creating a loan account in the company (i.e. deferred consideration for the purchase of the shares). Dividends from A Ltd would be paid into B Ltd and Mr B then draw the money out against his directors loan account.

B Ltd may shelter some of the dividends and use them to buy investments, or distribute in full to Mr B, depending upon circumstances.

He would lose BPR and lose Entrepreneur’s relief on the eventual sale of B Ltd, but stands to significantly gain in the short run.

We anticipate that Entrepreneur’s relief would be available, and that it wouldn’t be caught under Transactions in Security (because of the excluded circumstances in CTM36830), but would be grateful for readers thoughts on whether this would be caught under any anti-avoidance legislation.

Thank you in advance.

Replies (31)

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By The Innkeeper
07th Aug 2019 12:27

Had a similar situation a few years ago . Everything in my aged body screamed connected parties and there should be an anti avoidance provision. I could not find one. So to be belt and braces I put copious information in the 'white space' on the basis that the worst that could then happem would be interest on late paid tax. Advised client accordingly in writing and he was content with this.
Subsequently I discussed this issue with a tax lecturer whilst on a course. After a few moments thought he agreed that there was nothing in the legislation to stop this.

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Replying to The Innkeeper:
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By Adam12345
07th Aug 2019 12:38

You may want to look up the Transactions in Securities rules and check your PII.

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Replying to Adam12345:
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By Tax Dragon
07th Aug 2019 13:57

Oops, you're not Wilson.

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Replying to The Innkeeper:
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By Vile Nortin Naipaan
07th Aug 2019 13:41

How long is "a few years" ago?

If it wasn't before 24 March 2010 and the shareholding being disposed of wasn't exactly 25%, then I think you should tell us who the tax lecture was so that we can arrange for them to be shot.

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Psycho
By Wilson Philips
07th Aug 2019 12:40

Rather than relying on HMRC's guidance, which is misleading, you would be better reading the legislation - section 686 of ITA 2007.

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Replying to Wilson Philips:
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By Tax Dragon
07th Aug 2019 12:49

The OP should start a section earlier of course - you don't need to be excluded from a rule unless you are caught by it.

(I think the difference, if any, we had the other day on the whole s38/s39 thing came down to a similar issue.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
07th Aug 2019 13:11

Agreed. I had assumed that the querist had already "read" the preceding section, or was at least aware of it, to consider that his client may have been caught (otherwise why would he have taken the trouble to head to HMRC guidance?). My point was simply that HMRC's guidance on the exclusion does not say what the legislation does.

Please say that you agree :)

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Replying to Wilson Philips:
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By Tax Dragon
07th Aug 2019 14:02

I'm (always!) happy to agree.

But you assume too much of OPs, I fear. (This time, to be fair, it was not unreasonable to assume what you did - especially since the OP has asked about this company previously and was referred to TiS.)

Edit: Why doesn't Vile's comment appear above mine? Weird.

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
07th Aug 2019 13:34

In all fairness to HMRC, I think that their manuals do say what the legislation said, prior to the FA 2010 changes. I don't think it's misleading; I think it's out of date.

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
07th Aug 2019 15:01

But that particular manual paragraph didn't appear until April 2016. I can (almost) understand a failure to update existing guidance to reflect changes in legislation. Introducing new guidance based on old legislation is unforgiveable.

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
07th Aug 2019 15:04

I imagine the guidance existed somewhere else before that date and was transferred across. Plus I think their list of updates is a pack of lies.

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
07th Aug 2019 15:22

It might have done - but the only reference, in the TiS section of the CT Manual, to the fundamental change of ownership rules was just that - a reference, with no link to any detailed guidance on the subject.

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By Dib
07th Aug 2019 13:07

Isn't this just Cleary?

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Replying to Dib:
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By Vile Nortin Naipaan
07th Aug 2019 13:35

It's clearly 1/10th thereof, but with the other 90% not moving at all, it certainly isn't excluded (on or after 24 March 2010).

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
07th Aug 2019 13:58

Is it? G Ltd was a well established company with profits to distribute. The OP's B Ltd is a newco with nowt but debts.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
07th Aug 2019 14:48

You're just splitting heirs.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
07th Aug 2019 14:56

Maybe.

Whether or not for different reasons (and let's not get all Wilson-and-Dragon about it), we agree on the answer, I suspect.

S685(4)(b) refers.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
07th Aug 2019 15:03

I doubt it. Given the definition of income tax advantage in s 687, particularly the restriction in s 687(2), I would imagine s 685(4)(a)(i) would be in point.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
07th Aug 2019 15:08

Hi Vilson.

s685(4)(a)(i) is written in the present tense ("are available").

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Replying to Tax Dragon:
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By Tax Dragon
07th Aug 2019 15:15

Also, sss4 and 5 apply in different cases. Aren't we in ss3 (therefore also ss5)?

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Replying to Tax Dragon:
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By Tax Dragon
07th Aug 2019 15:21

You're confusing yourself Dragon.

And me.

Shut up, FFS.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
07th Aug 2019 15:51

What you need to do is start at s 684, but ignore s 684(1)(b) initially.

You need a transaction in securities, and the purposeful and actual obtaining of an income tax advantage. Before dealing with (b) it is better to then deal with the meaning of transaction in securities (s 684(2)), of which we do have one, and income tax advantage.

Then, s 687 deals with an income tax advantage, and we find in s 687(2) that at the time of the circumstances described in s 685(2)/(3) (which we're guessing is what s 684(1)(b) is all about) the company must have reserves lawfully available for distribution. If (or to the extent that) it hasn't HMRC have already lost their right to issue a counteraction notice, irrespective of our deliberations over s 685/s 686.

Armed with that knowledge, it is then difficult to imagine a circumstance where our relevant consideration that would give rise to a valid counteraction notice would ever be anything other than assets that were available (at that time) for distribution.

I accept that s 685(5) might be in point, as an alternative to s 684(a), but I believe that the latter applies because we are within s 685(2)(a). If not, I don't believe that we are within s 685(2)(b), and so s 685(5) would then be in point. IMO

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
07th Aug 2019 16:07

So where do the "future receipts" mentioned in s685(4)(b) fit (or not fit) in?

I think I've got my bedtime reading sorted out, anyway.

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Replying to Tax Dragon:
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By jpg80
07th Aug 2019 17:25

Thanks - once you've done that can you confirm your conclusion?

If all the dividends simply pass through to Mr B, there is no income tax advantage, this is a bringing forward of a CGT liability to crystalise a gain

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Replying to jpg80:
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By Vile Nortin Naipaan
07th Aug 2019 17:45

Of course there's a fuching income tax advantage... let's say the proceeds are £1,000,000, and let's treat the base cost as nil, and assume that his annual exemption is used elsewhere. He pays CGT of £100,000 and the next £1,000,000 of dividends get passed up and extracted income tax free (as repayments of the loan). Had he received the dividends directly (which is what would have happened but for the scheme), then, ignoring his presonal allowance, he would have paid income tax of more than £100,000, potentially up to £450,000.

Not paying income tax of more than £100,000, potentially up to £450,000 and instead paying CGT of only £100,000 is an income tax advantage.

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Replying to jpg80:
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By Vile Nortin Naipaan
07th Aug 2019 17:48

Why not get a TiS clearance, and put the matter beyond doubt? After all, proceeding with any restructure without appropriate clearances is likely to be considered negligent if it does go titz up.

Incidentally, what's the commercial rationale?

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Replying to jpg80:
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By Tax Dragon
08th Aug 2019 09:29

jpg80 wrote:

Thanks - once you've done that can you confirm your conclusion?

My conclusions are three:

1. Given the long-term downsides you say there are, I would want certainty on the short-term treatment
2. Vile is right – the way to get that is via a clearance application
3. Tax legislation can help you get to sleep, but it's no good for your dreams.

If you get client approval to seek HMRC clearance, would you be willing to post (the principles set out in) HMRC's answer?

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Replying to Tax Dragon:
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By jpg80
08th Aug 2019 13:18

Thanks - Yes. Will post response from HMRC once received

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Replying to Tax Dragon:
Psycho
By Wilson Philips
08th Aug 2019 14:10

You didn't copyright point 3 so I'm going to use that in my next presentation :)

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Replying to jpg80:
Psycho
By Wilson Philips
08th Aug 2019 14:23

If the intention is only to crystallise a gain why not do a share-for-share. Much more likely to receive clearance, I would have thought.

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By ctaguy
19th Aug 2019 22:14

Is the company a “close company” for TiS purposes? There are 10 separate shareholders each with 10%. Are they all / mostly directors?

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