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Loan Notes

Entrepreneurs Relief

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I am aware of the election available to tax loan notes in full rather than defer until the year of receipt. However, if the ER conditions were still met by the seller upon the receipt of the loan notes, is ER available? I thought it was but I note that ER isnt available on deferred gains, but is the above scenario treated as deferred gains?

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Psycho
By Wilson Philips
08th Jun 2020 12:54

Ask yourself why you would elect to crystallise the gain now rather than wait (hint - read the legislation) and you'll have your answer.

Edit - having re-read your question I don’t know what it is that you’re asking.

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Replying to Wilson Philips:
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By SA2016
08th Jun 2020 13:16

Apologies for confusion, scenario is as follows:

Shareholder holds 100% of shares, he sells 90% of them for cash and loan notes paid over 3 years
He is keeping 10% shares and will continue to be an employee for five years
For CGT purposes the receipt of the loan notes will be taxed when received, so over the three years. Will these subsequent disposals be subject to ER (Shares have been held for more than two years) ?

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Replying to SA2016:
Psycho
By Wilson Philips
08th Jun 2020 13:21

Thanks - that is clearer.

It will depend - are the loan notes QCBs?

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By Dib
08th Jun 2020 13:23

[Edit] Assumes the loan notes are QCBs

The election to which you refer is under s169R TCGA I assume. If this is the case then the election disapplies the no disposal rule by electing for the reorganisation which gave rise to the loan notes to be regarded as a disposal. This allows business asset disposal relief (formerly known as entrepreneurs' relief) to be claimed on the gain on the disposal of the shares.

If the election is made then there is a dry tax charge but it does bank the BADR(aka ER).

Absent the election, the disposal of the loan notes on their realisation would crystallise the latent gain in the loan notes (the gain rolled into the loan notes on the reorganisation). BADR (aka ER) is not available on a disposal of loan notes so the gain arising at that point would not be sheltered by it.

Obviously, if the election is made then tax is due at that point and if the loan notes are never redeemed (company gets into difficulty) the client will have paid tax for nothing. The trade off is that, if the election is not made, then more tax will be payable later assuming the redemption happens.

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Replying to Dib:
Psycho
By Wilson Philips
08th Jun 2020 13:27

I think you’ve got it the wrong way round. If the loan notes are QCBs then the gain is not rolled over. It is frozen and crystallises on disposal of the loan notes. It is the original gain on disposal of shares that materialises and so if ‘ER’ conditions continue to be met relief should be available.

Now, if they are non-QCBs ...

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Replying to Wilson Philips:
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By SA2016
08th Jun 2020 13:59

Thank you both, from further reading and reviewing your comments, why would you ever want them not to be non QCB's ( if you can get the ER in the future and you get bad debt relief on non QCB's)?!

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Replying to SA2016:
Psycho
By Wilson Philips
08th Jun 2020 14:45

For an individual undertaking an exchange the circumstances in which QCBs would be preferable are likely to be rare. Consider for example the situation where the securities are marketable and have increased in value. All other things being equal, which would you prefer - QCB or non-QCB?

And QCBs certainly have their place elsewhere.

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Replying to Wilson Philips:
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By SA2016
08th Jun 2020 15:10

To confirm, ER can be available on a non QCB when they are redeemed at a later date?

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Replying to SA2016:
Psycho
By Wilson Philips
08th Jun 2020 15:25

No

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Replying to Wilson Philips:
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By SA2016
09th Jun 2020 07:38

Sorry, I seem to be going round in circles here. I know it can be available (or unlikely per HMRC) for QCB's but where in the legislation does it say it wouldn't be for Non QCB's?

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64161

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Replying to SA2016:
Psycho
By Wilson Philips
09th Jun 2020 09:05

You are confused because I confused myself (in part due to Dib's assertion that 'ER' does not apply to loan notes) and got it wrong. For "No" above, please read "Yes".

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By Martin B
08th Jun 2020 14:36

Loan Notes/ ER -for future reference.

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