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Group Re-Org

Change in shareholding

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In a scenario such as the below, would the increase in Y's shareholding be caught under ERS and taxable as employment income? 

Trade co is owned by X,Y & Z 33.33% each.

X retires and is bought out by Y & Z via a new holdco by way of initial consideraton loan notes

New holdco now owns 100% of trade co following share for share exchange (with Y & Z and purchase of X's shares, however the shares in holdco are agreed to be 60/40 in the favour of Y.

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Psycho
By Wilson Philips
16th Sep 2021 14:01

I vote yes

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By AndyC555
16th Sep 2021 14:08

I have read the judgment of my learned colleague and agree with the conclusions.

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By Tax Dragon
16th Sep 2021 14:24

+1

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By SteveHa
16th Sep 2021 15:03

+2

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By Paul Crowley
16th Sep 2021 14:26

Always a good idea to add tax issues into any planning

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By The Dullard
16th Sep 2021 18:07

It depends how it's structured.

If New holdco is set up as a shell owned Y% by Y and Z% by Z and it then acquires the entire share capital of Trade co for a consideration comprising either shares (taken up by Y and Z in equal amounts, X%) or loan notes (taken up by X, and also worth the same as X% of shares), and X% + Z% = 2/3(X% + Y%), then I don't see an ERS issue, personally.

There seems to be a TiS issue for X though, however it's structured, as there isn't a fundamental change in ownership. Does Trade co have any reserves?

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Psycho
By Wilson Philips
16th Sep 2021 20:17

I was taking a very simplistic approach:

Ignore X (assume that he is getting his proportionate sahre of the value of the target company). Target company is worth £100, owned equally by Y and Z. Newco acquires target and issues shares to Y and Z. The combined value of those shares is worth £100. But Y now has a holding worth £60 compared to his previous £50.

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By Tax Dragon
16th Sep 2021 21:42

I'm not sure I agree, but you make a valid point that isn't covered in the OP and in relation to which I made an assumption (which may therefore necessarily be incorrect)... is Y paying full value for the increased holding?

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Replying to Tax Dragon:
Psycho
By Wilson Philips
16th Sep 2021 21:57

If Y is offering £50 worth of shares in return for £60 worth of shares I’d say that he isn’t paying full value.

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By Tax Dragon
16th Sep 2021 22:18

And that was how I read the question, hence my +1, but if Y is putting £25 into newco for the extra shares (and we're not told whether s/he is or isn't), then it's less clear.

It's a big omission in the information provided.

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Psycho
By Wilson Philips
17th Sep 2021 07:56

One doesn’t normally pay when there is a share for share exchange although I concede that there is nothing to prevent it. But, to apply Justin’s logic, if it hasn’t been mentioned then it isn’t applicable.

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By Jigs
17th Sep 2021 07:45

Thank you all.

Realistically the purchase of X's shares will be funded by cash within target and dealt with as a dividend. Future amounts paid in loan notes will be funded by future profits in the same way.

Y & Z have no personal funds.

NB: The reason Y is having more of holdco is basically because that is what they have decided between themselves i.e Y deserves more of profits going forward which sounds to me to be employment related

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By AndyC555
17th Sep 2021 13:02

"Y deserves more of profits going forward "

Why not just have (equal) shares but of different classes so that different rates of dividend can be voted? That way if the position changes such that Z deserves more of profits that can be handled on a year by year basis.

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By DKB-Sheffield
17th Sep 2021 21:23

+1

If the sole purpose is the allocation of future dividends, 2 classes may well be the better option. It wouldn't have to be set in stone that dividends are 60:40 ad infinitum, which would be the case with the 60:40 split (excluding future share reorganisations).

However, if the underlying reason for the 60:40 split is that Y should be granted 60% of the assets on winding up, this may be a different, less flexible (re. dividends) position.

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