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Is Corp tax chargeable on unrealised gains?

Unrealised gains on investment shares - is Corp tax chargeable

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Limited company made £100k of investments during its company year - all investments in publicly traded shares (not funds or unit trusts, they bought shares directly in companies).

Under FRS102 we need to show the investments at market value at year end which is easy to do as they are publicly traded shares. The result is an unrealised gain of roughly £30,000. 

Our problem comes with regards to Corporation tax - my gut says that as the gains are unrealised there can not be a Corporation tax liability from them. Instead we should calculate what the Corp tax liability would have been if they had been realised gains at the end of the company year and include this as deferred tax in the accounts. In the CT600 we would simply deduct the £30k unrealised gain from the accounting profit to arrive at the taxable profit. 

I then spoke to a well known (very large) firm of financial advisers that a number of my clients use and they sent me a factsheet which they produced in mid 2018 stating that only investments in funds that are set-up as Unit Trusts do not result in a Corporation tax liability for unrealised gains i.e. investing in shares directly will result in a Corporation tax liability for unrealised gains - they go on to say this could cause the company major cash flow issues so they are not referring to deferred tax they are referring to straight-up payable Corporation tax. 

I've searched for hours to try and find the answer. I've read numerous previous questions that relate to this and I cannot find a definitive answer anywhere. I've spoken to HMRC's Corp tax helpline (on hold for 35 minutes before I got through) and they could not answer my question or tell me where to look.

Does anyone know the answer and can point me in the direction of any guidance? 

It would be hugely appreciated - I've pulled so much hair out over this I don't have much left :(

As always - thank you to everyone for taking the time to read my question and any thoughts you have are very welcome. 

p.s. If I have made any silly errors in any of the above please do feel free to point them out as bluntly as you like - I can take it :

Replies (16)

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Psycho
By Wilson Philips
06th Sep 2019 13:35

Experience has taught me that while some IFA’s are undoubtedly fairly well-versed in tax many of them make it up as they go.

I’d be interested in reading that factsheet.

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By Justin Bryant
06th Sep 2019 13:45

Where does it say in TCGA 1992 or elsewhere that such unrealised fixed asset gains are subject to CT (as far as I'm aware, such unrealised gains are not carved out of TCGA and within the CT regime)? They would only be taxed if held as current asset investments.

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Replying to Justin Bryant:
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By WhichTyler
06th Sep 2019 15:53

How is the OP able to tell the difference between fixed and current asset investments? I know that my old client who used company funds to buy and sell shares would answer ' whichever one means I don't have to pay tax'.

If it means looking back at the original intention, remember that a long term investment is just a short term investment that went wrong...

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Replying to WhichTyler:
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By Justin Bryant
09th Sep 2019 10:19

There is plenty of case law on this point re properties etc. I suggest you just Google that question for all that.

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Lone Wolf
By Lone_Wolf
06th Sep 2019 13:45

It's not taxable. Shares are only "taxed" when they are actually disposed of.

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By Duggimon
06th Sep 2019 13:50

Within the financial industry, there are some types of investment fund set up who are taxed on unrealised gains, and some which aren't. This is because in some circumstances it's easy to put income into unrealised gains and avoid or defer paying tax.

I suspect the people you spoke to have conflated this with the general case of companies owning shares, when it is in fact entirely irrelevant unless the company of whom you speak trades in investment portfolios.

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Lone Wolf
By Lone_Wolf
06th Sep 2019 14:00

Some legislation to help.

Generally, tax follows the accounts, unless there is something in statute that says not to. Your FRS102 complaint accounts will show an unrealised gain.

The unrealised gains is a capital receipt.

CTA 2009 s93(1) states: "Items of a capital nature must not be brought into account as receipts in calculating the profits of a trade."

So that excludes the receipt from being taxed as trading income.

Could it be caught by TCGA 1992? No, because TCGA 1992 s2(1) states: "As a result of section 2(1) and (2) of CTA 2009, corporation tax is charged on chargeable gains accruing to a company on the disposal of assets."

You don't have a disposal of assets, so it does not fall within TCGA 1992.

Unless there is a piece of legislation somewhere which deems the revaluation to be a disposal, then I'd safely conclude that the unrealised gain is not taxable.

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Replying to Lone_Wolf:
7om
By Tom 7000
09th Sep 2019 11:08

You are wasted...
You should have a proper job with that level of knowledge

.... not playing on A WeB all day….

:P

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By fawltybasil2575
06th Sep 2019 14:27

@ Archie-Bald (OP).

I would recommend your sending a letter to the Financial Advisors along the lines of:-

“Your helpsheet of xx/xx/xxxx contains very useful information. May I request your assistance please in relation to page ( ) of that helpsheet and specifically the words:-

‘[ENTER THE WORDS WHICH YOU CONSIDER CONTAIN FALSE INFORMATION]’

My understanding is that the above information is not unfortunately correct. Since I am sure that you would not wish to inadvertently misinform your clients, may I request you to kindly direct me to the SPECIFIC legislation (if possible enclosing a copy thereof) which you consider supports your interpretation of the legislation.

Yours sincerely,

Archie-Bald [formerly "Archie-Balding" :)]”

The above is IMHO the appropriate means of acting in the interests not only of your clients, but also the clients of the Financial Advisors. More generally, the same approach should be considered whenever you receive comment, especially by HMRC but also by other parties, which you consider is inaccurate.

Basil.

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Replying to fawltybasil2575:
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By Justin Bryant
06th Sep 2019 14:49

Wow! We need much more of this sort of thing here.

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By Bluffer
09th Sep 2019 10:27

There's been no chargeable disposal, so there's no chargeable gain on which to pay corporation tax.

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By David Gordon FCCA
09th Sep 2019 11:54

To the best of my professional experience
CGT is charged on realised gains.
1)This means the earlier of receipt of the proceeds of sale (In money or kind) or
2)
date of irrevocable contract to sell.

So, real case;
A transferred his shares to B, but agreed to take stage payments over three years.
The ruling was CGT is assessible at date of irrevocable share transfer with or agreement document, not date of receipt of the money.

If there is no transfer of ownership there is no tax, but see anti-avoidance provision 1) above.

What counts as an "Irrevocable Sale"? ask the lawyers!

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By Archie-Bald
09th Sep 2019 11:57

Thank you to everyone who has replied and especially to Lone Wolf - for all of the references, it is hugely appreciated!

The original factsheet provided by the IFA was 2 pages long, after speaking to him this morning it turns out there is a detailed Tax Guide that the fact sheet is a very small summary of - the detailed guide is called "Taxation of company investments under FRS102" and is 15 pages long. I will read through this (hopefully later today/tonight) and report back with anything interesting. :)

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By North East Accountant
09th Sep 2019 17:51

Or prepare the Accounts under FRS105 (If you can) and just leave in at cost, with gain taxable when they are sold.

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By JCresswellTax
10th Sep 2019 09:46

I love these threads so much. They are few and far between now but remind me of the good old days of accounting web :)

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By Archie-Bald
10th Sep 2019 13:53

Hi everyone :)

My apologies for the delay in coming back to you all - I have now read the full 15 page guide and the IFA is wrong!!

He thought all investments made by a limited company EXCEPT investments in Unit Trusts would be revalued each year and tax would be calculated and paid through the CT600 return even if the gains had not been realised.

The 15 page guide says that Debt based Unit Trusts (not equity based Unit Trusts) and both onshore and offshore Investment Bonds would be revalued each year end and tax paid on any unrealised gains through the CT600.

BUT stocks and shares investments would be revalued at year end and the tax on unrealised gains would be deferred tax and not payable until a gain was fully realised.

Hope that makes sense - typing at 100 miles an hour before my laptop runs out of 2% battery!

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