Share this content
25

Entrepreneurs’ Relief

Changes ahead

Didn't find your answer?

We hear it every year but there seems to be a greater chance of changes to ER next month. 

A client has suggested that they want to bank ER by exchanging all shares in the company for shares in a new holding company. Ignoring considerations about the merits of crystallising a dry tax charge, this would seem to me to fall squarely within TiS territory?

All agreements/dissenting opinion welcome. 

Replies (25)

Please login or register to join the discussion.

avatar
By Adam12345
03rd Feb 2020 13:07

I agree. This type of planning is exactly what TiS anti-avoidance was designed to prevent.

Certainly worth waiting until 11th March but ER does seem an easy target when the government have already pledged not to increase income tax and NI.

Thanks (1)
avatar
By Dib
03rd Feb 2020 13:25

Wondering where the income tax advantage to be counteracted in this transaction is?

Thanks (1)
Replying to Dib:
avatar
By The Dullard
03rd Feb 2020 13:32

Ditto. And which condition in s 685 is being met?

Also, see https://www.taxation.co.uk/Articles/readers-forum-running-scared. You're suggesting doing largely the same thing in a different way. You still have the same issues, particularly with regard to valuation.

Thanks (1)
Replying to The Dullard:
avatar
By Justin Bryant
03rd Feb 2020 14:23

Sanctimonius does not know what he's talking about. A rescindable sale (not a gift) to a settlor interested trust before the Budget is the way to go here to bank ER.

Thanks (1)
Replying to Justin Bryant:
Psycho
By Wilson Philips
03rd Feb 2020 14:48

Very helpful I’m sure in appropriate circumstances but since it doesn’t answer the question I’ll ignore it.

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
03rd Feb 2020 14:53

How on earth does that not answer your question? I have just spelled out pretty clearly what your client should do and what he should not do. A sale to a trust is about as far from Cleary as you can get re TiS. I'll end there.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
03rd Feb 2020 15:01

Because, for the hard of understanding, the question - and the only question - was whether TiS would be in point in respect of the client’s proposal. I did not ask for suggestions as to what might be done instead. I’m well aware of alternatives - the question was about only one of them.

Thanks (0)
Replying to Justin Bryant:
avatar
By The Dullard
03rd Feb 2020 15:03

Rescindable how? In the context of s 28(2), I mean.

Thanks (0)
Replying to The Dullard:
Lone Wolf
By Lone_Wolf
03rd Feb 2020 15:38

Looks like if the agreement is properly written up, then a rescindable agreement is not deemed to be a conditional agreement for TCGA 1992 s28(2).

I've only done some brief reading on this but this link is a start: http://taxbar.com/wp-content/uploads/2016/01/Cake_and_Eat_It_Uncondition...

Thanks (0)
Replying to Lone_Wolf:
avatar
By Tax Dragon
03rd Feb 2020 16:47

Sounds like an excuse for legal types to charge a big fat fee.

Why pay that, if the client's far simpler idea has legs - as appears to me to be the case?

Thanks (1)
Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
04th Feb 2020 10:48

Is the issue with that plan not that you're triggering a tax charge for something that might not even change. A rescindable contract on the other hand avoids the CGT arising if the changes don't go through?

Thanks (0)
Replying to Lone_Wolf:
avatar
By Tax Dragon
04th Feb 2020 10:52

That's the beauty of an election.

You don't have to make it.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
04th Feb 2020 11:02

But one would then be relying on application of section 135. As I’ve said, I’m not confident that I could come up with a suitably robust commercial purpose case.

And I did say in my original question that the issue of generating a dry tax charge was to be ignored for the purpose of answering what is a very specific question.

Thanks (0)
Replying to Wilson Philips:
avatar
By The Dullard
04th Feb 2020 11:25

Wilson Philips wrote:

But one would then be relying on application of section 135. As I’ve said, I’m not confident that I could come up with a suitably robust commercial purpose case.

If only somebody could suggest a suitable alternative. :P

Thanks (0)
Replying to The Dullard:
Psycho
By Wilson Philips
04th Feb 2020 13:17

Indeed. But the “suitable alternative” proposed by Mr B would not be suitable in this case. In fact, very few alternatives would be suitable. Which is why I am only really concerned with the question asked.

I was simply looking for some weaponry with which to return to client and tell him that his plan would or would not work.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
04th Feb 2020 13:26

Wilson Philips wrote:

And I did say in my original question that the issue of generating a dry tax charge was to be ignored for the purpose of answering what is a very specific question.

Forgive me, I thought your specific question had been answered, but Wolfie's supplementary question not.

Thanks (0)
Replying to Dib:
avatar
By SWAccountant
04th Feb 2020 15:31

I agree with Dib. No value is being extracted so there's nothing to apply TIS to? Otherwise, surely TIS would apply to almost every share exchange regardless of whether a s169Q election was made.

Thanks (0)
By ireallyshouldknowthisbut
03rd Feb 2020 13:36

I would almost guarantee they will seek to push it up due to all the contractor co's due to unwind in the next 12 months. Rich pickings to be had which will result in a short term boost to the tax take figures.

Thanks (1)
Replying to ireallyshouldknowthisbut:
avatar
By Manchester_man
03rd Feb 2020 23:31

I think you are spot on the money there!

Thanks (0)
avatar
By nrw
04th Feb 2020 09:22

Depending on the circumstances, it may be possible to do a share exchange (clearance available) and elect to realise the ER qualifying gain?

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64155

Thanks (0)
Replying to nrw:
Psycho
By Wilson Philips
04th Feb 2020 10:47

That was indeed the plan. But the question was whether TiS would counter it. In fact, since there is no bona fide commercial purpose behind the proposal, I’m not convinced that an election would be required (but would be made in any event).

My initial thinking that TiS would apply was instinctive and I am grateful to those respondents that have reminded me it is dangerous to rely on instinct. For the avoidance of doubt I am less grateful to those that chose not to answer the question but to do their usual and go off on a tangent instead (not you, BTW).

Thanks (1)
Replying to Wilson Philips:
avatar
By Justin Bryant
07th Feb 2020 11:31

Reluctantly my final, final word is that you have not read this case (or my recent comments on it):

http://www.bailii.org/uk/cases/UKFTT/TC/2020/TC07532.html

The point is not whether TiS applies (no-one knows the answer to that). The point is how do you avoid that TiS argument in the 1st place and my solution minimises (if not extinguishes) the risk of that argument (and a clearance will be worthless if you don't explain the main reason is CGT mitigation - and then it will be declined of course).

That said, a sfs x/c would be lower risk of course (but you would still have to disclose as above).

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
07th Feb 2020 11:54

I did subsequently read the case and in fact thanked you (elsewhere) for the link.

The point is not that there is an alternative solution. The alternatives are not, for various reasons, suitable in this case. My question was very specific and I am grateful to those that have attempted to answer it.

Why do you think that HMRC would refuse a TiS application in respect of CGT mitigation, given that TiS is specifically written to counter an income tax advantage?

And your last comment makes no sense. I was asking about a share-for-share exchange, you appear to be suggesting that your solution would reduce the risk, but then say that share-for-share would be lower risk???

Thanks (0)
Replying to Wilson Philips:
avatar
By Dib
07th Feb 2020 13:44

I think that the point is that s137(1) TCGA requires the exchange of shares or scheme of reconstruction to be effected for bona fide commercial reasons and not to form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax. So HMRC would refuse to give clearance under s138 but couldn't counteract under TiS

Thanks (0)
Replying to Dib:
Psycho
By Wilson Philips
07th Feb 2020 13:53

Refusal to give clearance for section 138 would be fine and dandy, given that the individual isn’t concerned about crystallising a tax charge.

I agree that it would be better if clearance could be obtained, giving the taxpayer the flexibility of making or not making an election to disapply it.

Thanks (0)
Share this content