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Is this a trading company for ER purposes?

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A, B and C all own 100% of their respective companies, A Ltd, B Ltd and C Ltd.

These companies each own a 1/3 share in Holdco Ltd.

Holdco owns and rents out a property, and also owns 100% of Tradeo Ltd. The value of Tradeco far outweighs the value of the property, safely makes up much more than 80% of the assets in Holdco.

A company is coming in to buy the shares in Tradeco Ltd. Any disposal will qualify for SSE in Holdco which will then distribute all cash to A Ltd, B Ltd and C Ltd. The property may also be disposed of so we are likely going to be left with 3 companies holding only cash, and an empty Holdco.

My question is would entrepreneurs’ relief be available to A, B and C on the winding up of A Ltd, B Ltd and C Ltd?

On the face of it, these 3 companies meet the definition of “Trading company” under s165A – their only activity has been the acquisition of a significant interest in the share capital of the holding company of a trading group [subsection 4(d)].

However here’s where the complications lie. Initially, A, B and C each owned 1/3 of Tradeco. Over the last three years they have carried out a share for share exchange with Holdco, so that Holdco owned 100% of Tradeco and they owned 1/3 each of Holdco.

Then about 6 months ago (before there was any sign of a potential buyer) they carried out another share for share exchange. This time swapping their shares in Holdco for shares in A Ltd, B Ltd and C Ltd.

Clearance was granted for both transactions.

Does the fact that A Ltd, B Ltd and C Ltd were created for the share for share exchange transactions, and so not set up with the purpose of acquiring trading companies, mean they don’t meet this definition of a trading company?

On the other hand the only activity of A Ltd, B Ltd and C Ltd has been to acquire the holding company of a trading group, in exchange for shares in themselves so I can see an argument both ways.

Does anyone have any opinions on this?

Thanks

 

Replies (28)

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By Tax Dragon
03rd Jul 2019 12:04

Have you read s165A(6)(a)?

Edit: Ignore me.

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By Tax Dragon
03rd Jul 2019 13:14

I gave the wrong answer because you have asked the wrong question. Read s165A again. (And be aware that it does not apply for ER wholly as written, though I doubt the deviations make any difference here.)

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
03rd Jul 2019 14:29

Help me out Dragon, what question should I be asking?

I've read through s165A again and have come to the same one.

The ER provisions point you towards s165A for the definition of "Trading Company" and "Trading Activities". The acquiring companies would be joint venture companies I believe so clear s165A(6).

I've probably been staring at this too long and am missing something obvious here.

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Replying to Lone_Wolf:
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By Tax Dragon
03rd Jul 2019 15:31

"Preparing to" provisions help you out only while you are preparing to.

I read "with a view to " in the same light.

Suppose A Ltd, B Ltd and C Ltd had all held TradeCo directly since inception. Then what?

(Do you want me just to tell you the answer, or will you have one last read?)

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
03rd Jul 2019 15:49

I'll have one last go...

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
03rd Jul 2019 16:23

So are you saying that once they've acquired TradeCo, they are no longer trading, unless they continue to carry on activities with a view to acquiring interests in other trading companies?

So the provisions only apply to company's whose purpose is to seek out and invest in trading companies?

In which case A Ltd, B Ltd and C Ltd wouldn't be trading companies, as they don't continue to seek trading companies to invest in.

If A Ltd, B Ltd and C Ltd had owned the shares directly... they wouldn't be holding companies of a trading group as they don't own 51% so no ER and if my thinking above is correct, they wouldn't meet the "trading company" test in s165A as they don't continue to seek investment opportunities.

If that's not it then I give up...tell me the answer please :)

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Replying to Lone_Wolf:
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By SWAccountant
03rd Jul 2019 16:36

I've only skimmed the original post, but isn't it a case of simply looking through the share-exchange transactions?

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Replying to SWAccountant:
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By Tax Dragon
03rd Jul 2019 16:45

No. That's relevant for the period of ownership, sure, but not for meeting the trading conditions.

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Replying to Tax Dragon:
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By SWAccountant
04th Jul 2019 09:58

I disagree, actually. So do HMRC it would seem.

CG63975 states with regards to re-organisation of share capital "Entrepreneurs’ Relief may be due by looking through the exchange (to which TCGA92/S127 applies) to ascertain whether all the conditions of section 169I(6) have been met"

As s169I(6) includes the trading requirement, the look through must also extend to this aspect.

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Replying to SWAccountant:
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By Tax Dragon
04th Jul 2019 11:00

You're right. I missed out some words. I should have said:

"No. That's relevant for the period of ownership, sure, but not for whether the new shares meet the trading conditions."

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Replying to Lone_Wolf:
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By Tax Dragon
03rd Jul 2019 16:44

You're missing the point of s165A(7).

You need to be aware that it needs to be read subject to Sch7ZA, but I don't think that will trouble you.

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By Vile Nortin Naipaan
04th Jul 2019 11:21

Whilst A Ltd, B Ltd and C Ltd would appear to each be 1/3rd of the holding company of a trading group, I agree with Tax Dragon that they have not been so for the two years prior to the disposal event (capital distributions on their respective liquidations).

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
04th Jul 2019 11:43

For the period exchange to DE, s165A(7).
For the period (DE - 2 years) to exchange, the point that SWAccountant is making kicks in.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
04th Jul 2019 12:04

I think we are in agreement that the shares in A Ltd, B Ltd and C Ltd, have been owned by A, B, and C throughout the qualifying period, but that A Ltd, B Ltd and C Ltd have not been 1/3rd of a holding company of a trading group throughout that period.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
04th Jul 2019 12:19

That's incontrovertible.

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Replying to Tax Dragon:
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By SWAccountant
04th Jul 2019 16:43

I'll controvert that.

A, B & C own TradeCo. An exchange takes places 3 years ago so that A, B & C own HoldCo, which owns TradeCo.

The share exchange rules set out that A, B & C's ownership of HoldCo stands in the shoes of the previous ownership of TradeCo; HoldCo shares are seen to have been bought at a time and price equal to the previous ownership of TradeCo.

The same happens when A Ltd, B Ltd and C Ltd acquires HoldCo.

A, B & C are seen to have always owned TradeCo and the conditions of s169I(6) are applied to the disposal of A Ltd, B Ltd and C Ltd as though they were TradeCo shares.

I may be being dumb but I can't see that it operates in any other way?

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Replying to SWAccountant:
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By Vile Nortin Naipaan
04th Jul 2019 17:12

Nobody's disagreeing with you, but you're focusing on ownership of the shares.

The shares in A Ltd, B Ltd and C Ltd inherit the ownership of HoldCo's shares, which inherited the ownership of TradeCo.

However, HoldCo didn't get to inherit TradeCo's trading history, because TradeCo still has it.

Likewise, A,Ltd, B Ltd and C Ltd, didn't inherit the holding company of a trading group history from HoldCo, because HoldCo still has it.

Once A Ltd, B Ltd and C Ltd acquired HoldCo the joint ventures provisions apply to treat A Ltd, B Ltd and C Ltd as each carring on a proportion (1/3rd) of HoldCo's (being the holding company of a trading group) activity.

So, whilst A, B and C are deemed to have held their shares in A Ltd, B Ltd and C Ltd for donkey's years (thus satisfying the personal company part of the requirement), the problem is that A Ltd, B Ltd and C Ltd have only satisfied the trading part of the requirement (in s 169I(6)(a)), necessary for ER to apply, for 6 months.

The ownership inheritance rules of s 127 concern themselves with the shares (as an asset), whilst the qualifying criteria in s 169(I)(6) concern themselves with the company (as an entity) in which those shares have been disposed. If you cannot distinguish between the two, then, sorry, yes, you are being dumb.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
04th Jul 2019 17:39

But surely that's not the end of it, else every time you put a new holdco on top (or whatever), you'd restart the ER clock.

You have to look at the last two years and say whether the asset - the shares you held - were qualifying shares at each part of those two years.

Else I think I'm being dumb too.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
04th Jul 2019 18:24

No. It's me being dumb!

I am missing the "as if they are the same company" in s 135(3) and s 136(2)(b).

So, I agree with your analysis. What I now fail to see though is how you seem to be disagreeing with SWAccountant's take on CG63975?

I find that I was actually in disagreement with CG63975, but have now got myself to the point of agreeing with it.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
04th Jul 2019 18:50

I didn't think I did disagree, though I'm starting to doubt my own sanity a bit now.

SWAccountant's analysis by itself doesn't get Wolfie home; nor does s165A(7). Wolf needs both bits. That's what I thought (I'd said) at 11.43.

The OP (or so I thought) was just about s165A.

Maybe it shouldn't have been! :-)

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Replying to Tax Dragon:
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By SWAccountant
05th Jul 2019 09:56

So, we all agree then?

s165(7) lets A Ltd etc acquire trading status of TradeCo using the JV provisions.

CG63975 / s135 / s136 allow this to be "backdated" to the date that the individuals first acquired TradeCo.

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Replying to SWAccountant:
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By Vile Nortin Naipaan
05th Jul 2019 10:23

Yes "the company" was initially TradeCo, which was a trading company. Then "the company" was Holdco, which was the holding company of a trading group.

Next by reference to what we now know to be the qualifying period, in relation to the disposals of the shares in A Ltd, B Ltd, C Ltd, began while "the company" was still HoldCo.

6 months ago A Ltd, B Ltd and C Ltd, each became 1/3rd of "the company" and were each 1/3rd of a holding company of a trading group.

So, at all times during the two year qualifying period "the company" has been both a "personal company" of the individual and the holding company of a trading group. As long as the individual has been an officer or employee of "the company" during the two year period, ER is available on the disposals of shares in A Ltd, B Ltd and C Ltd that the capital distributions on their winding up will represent.

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Replying to SWAccountant:
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By Tax Dragon
05th Jul 2019 11:00

And yes, though I don't much like the word "backdated". You test what you had at each stage of the two year period. The legislative fictions are that you own, and are testing, the same thing throughout that period.

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Replying to Tax Dragon:
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By SWAccountant
05th Jul 2019 13:13

Hence the quotation marks.

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Replying to SWAccountant:
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By Tax Dragon
05th Jul 2019 13:59

Your punctuation is evidently more powerful than mine. But the important thing is that we are all agreed, and I think we have all learned from the discussion. I know I have - and I thank you and Vile for your parts in that. (And Wolf, for asking the wrong question.)

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
05th Jul 2019 14:17

Tax Dragon wrote:
(And Wolf, for asking the wrong question.)

I did so intentionally purely for us all to go on this journey of discovery. Honest...
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Lone Wolf
By Lone_Wolf
05th Jul 2019 10:53

Big thanks to Tax Dragon, SWAccountant and Vile Nortin Naipaan for clearing this all up.

I was aware that A Ltd, B Ltd and C Ltd inherited the ownership period all the way from TradeCo, but didn't quite appreciate that they also inherit the status of trading company, and holding company of a trading group, from them.

I thought A Ltd, B Ltd and C Ltd would have had to meet those conditions based on their own activities but thankfully not, which as Tax Dragon notes means I have asked the wrong question in the OP.

Cyber pints all round.

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Replying to Lone_Wolf:
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By Tax Dragon
05th Jul 2019 11:07

I'm not sure I like the word "inherited" much more than I like "backdated", tbh, but I think you have your answer, so let's not get stuck on semantics! (So long as it is semantics!)

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