Purchase of asset prior to liquidation

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Company is about to go into solvent liquidation with a bundle of cash. One of the shareholders wants to buy a depreciating asset with his share of the proceeds. Ignoring capital allowances, it would seem to be tax-efficient for company to purchase the asset and then distribute to him. For example, asset costs £500k. Company could distribute £500k cash to him and he pays £100k CGT. He buys asset himself (he'll need to find £100k from his own pocket to make up the whole £500k).

Or, company could buy the asset and then distribute it to him when it has a s/h value of say £450k. He only has to find £90k to pay his CGT bill.

Apart from the argument about s/h value, anything wrong with this hare-brained idea?

TIA

Replies (30)

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By Paul Crowley
24th Jun 2024 18:06

I must be missing out something.
£500K distribution means CGT on the distribution, no matter if it is cash or a thing
What am I missing?

Assumed the thing is for trade, company or self-employed, then new trade gets the capital allowances.

I assume thing is not an electric car.

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Replying to Paul Crowley:
By Ruddles
24th Jun 2024 18:27

I think you’re missing the OP’s point that the asset value (ie chargeable distribution) will be £450k and not £500k.

To the OP - one flaw in the plan is that if the assets are now worth only £950k the other shareholder (assuming there are two) will only get £475k in cash. How is s/he going to feel about that?.

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Replying to Ruddles:
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By Paul Crowley
24th Jun 2024 18:37

I ignored the or bit
If the thing is for trading, then he cannot get it and use it until the value falls.
BIK in that time?

Without detail this is just half of a question

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Replying to Paul Crowley:
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By 1874
24th Jun 2024 18:50

Why did you ignore the or bit, given that the whole purpose of the question was to compare two scenarios?

But the shareholder will not use the asset for trading. The thinking is that its secondhand value will immediately be lower than value when new. As I said, that may be an arguable point - I just wanted to know if anything else was being overlooked.

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Stepurhan
By stepurhan
25th Jun 2024 08:18

Your dismissal of the second-hand value of the asset as a mere detail seems, at best, naive.

The company is purchasing the asset for the express purpose of distributing it to the shareholder. I think you will have a great deal of trouble arguing it has genuinely dropped in value as "second-hand" under those circumstances.

You also seem to be ignoring a point that others have made. If you were to somehow argue that the asset had dropped in value, the company has now made a £50k loss. Not a trading loss (not a trading asset) so no loss carry-back either. How will that affect the other shareholders' distrbutions?

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Replying to stepurhan:
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By 1874
25th Jun 2024 09:11

What is it with people's inability to read properly on this site? I have not dismissed the second-hand value as a 'mere detail'. I am well aware of the issue which is why I said it was an arguable point. To repeat myself, again, what I was looking for were pointers to any OTHER issues that I may have overlooked. And in that regard I am indeed grateful to those that have pointed out the potential impact on the other shareholders. I wasn't ignoring it - it simply hadn't occurred to me but I'm thankful that it has now been pointed out to me.

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Replying to 1874:
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By Tax Dragon
25th Jun 2024 09:22

Most respondents are either retired or taking 3 minutes out of a busy day to look at multiple posts on Aweb over a cuppa. If you're relying on detailed reading of, and deep, well-considered responses to, this type of question, you will be disappointed.

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Replying to Tax Dragon:
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By 1874
25th Jun 2024 09:32

Disappointed it is, then.

But I thought this point was rather plain and didn’t require much detailed reading - “Apart from the argument about s/h value”

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Replying to 1874:
Stepurhan
By stepurhan
25th Jun 2024 10:47

My point is that I think the second-hand valuation "argument" is so fundamentally flawed that it renders the entire plan void.

If you were asking how much fuel to put into a vehicle, would it be ignoring the question asked if someone pointed out said vehicle did not have an engine?

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Replying to stepurhan:
By Ruddles
25th Jun 2024 11:19

I’m inclined to agree with you. However, OP is silent on the nature of the asset but, playing Devil’s Advocate, what if it is in fact a car? As anyone knows, the value of a new car drops dramatically the moment that it is driven 1 mile. I don’t think s/h value is so much the flaw in the plan as the point about the impact on other shareholders.

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Replying to Ruddles:
Stepurhan
By stepurhan
25th Jun 2024 13:06

Ruddles wrote:
I don’t think s/h value is so much the flaw in the plan as the point about the impact on other shareholders.


Unless the client in the OP has an agreement to take the entire hit themselves, I would expect that to kill the plan as well.
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Replying to stepurhan:
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By 1874
25th Jun 2024 09:11

.

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By mumpin
25th Jun 2024 09:39

Shouldn't you be asking the IP who's going to have to sign off on it all?
One time I tried to suggest something similar with inter-co loans being netted off, the IP wasn't at all keen.

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Replying to mumpin:
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By Paul Crowley
25th Jun 2024 12:58

I agree, the IP would be the person to ask.
Why would IP be looking to reduce the value of the company as part of a tax avoidance/reduction scheme.
Surely his job is to preserve the value of the company, not destroy it.

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Replying to Paul Crowley:
By Ruddles
25th Jun 2024 13:06

Again, playing Devil's Advocate, if the asset is acquired before the asset is acquired (presumably from an unconnected party) then there's not a lot that the IP could do about it. However, I do agree that they would want to make sure they were appointing a friendly IP - whose job is not to preserve the value of the company but simply realise the company's assets and distribute the net funds. It would be ironic if the IP made the decision to sell the asset to the highest bidder rather than distribute it.

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Replying to Ruddles:
By Ruddles
25th Jun 2024 14:44

Ruddles wrote:
if the asset is acquired before the asset is acquired

That would be a neat trick.

What I meant of course was "if the asset is acquired (presumably from an unconnected party) before the IP is appointed"

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By Paul Crowley
25th Jun 2024 12:54

Is this not a preordained series of transactions the sole purpose of which is to avoid tax?
Could it be described as a scheme?

Just speculating, not giving an opinion.

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Replying to Paul Crowley:
By Ruddles
25th Jun 2024 13:01

It does sound iffy to me. Does it need to be a 'scheme' to fall foul of GAAR?

Just speculating, not giving an opinion.

;¬)

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Stepurhan
By stepurhan
25th Jun 2024 13:01

OK, let me respond ignoring the second-hand valuation.

Under the original scenario, the individual ends up with net assets of £400k (£500k cash less £100k CGT bill).

Under the revised scenario the individual ends up with net assets of £360k (£450k "second-hand" asset less £90k CGT bill). They appear to lose £40k from the alternative transaction.

Why are you suggesting structuring the transaction so your client ends up £40k worse off? I have a theory, but I'm not sure you'd want to hear it.

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Replying to stepurhan:
By Ruddles
25th Jun 2024 13:14

I spot a potential flaw in your figures. Under scenario 1 he ends up with net assets of £350k - if the asset is worth only £450k in the company's hands then surely it is worth only £450k in his hands? So I can see where the £10k "saving" appears to come from.

However, again thinking about cars, under scenario 2 there would be an additional 'owner' on the V5, so would this depress the value even further? I think the OP was spot on with the original analysis of 'hare-brained'.

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Replying to Ruddles:
By Ruddles
25th Jun 2024 14:12

And thinking even further about cars (I'm wondering what other type of asset the OP has in mind that would depreciate so quickly) while I'm no expert in the market I'm sure that £500k would get you a nice bit of metal and I wonder by how much that sort of car would depreciate, compared to a standard family saloon/estate.

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Replying to Ruddles:
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By FactChecker
25th Jun 2024 15:23

Not my area by a long way, but anecdotally I thought that one reason those who are both petrol-heads and filthy rich are so keen on cars costing a minimum of £500k ... was that they usually (but not invariably) *increase* in MV on purchase! [Presumably assumes little or no driving - but the old supply'n'demand kicks in.]

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Replying to FactChecker:
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By Paul Crowley
25th Jun 2024 17:36

Long time frame and order delays when getting one of those nice cars.
Company would need to be buying from the person that orders just for profit, not use.

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Replying to Ruddles:
Stepurhan
By stepurhan
26th Jun 2024 08:32

It's because I was stopping my calculations before the asset purchase, focussing solely on how much they are realising directly from the company liquidation. I cannot help thinking any HMRC enquiry would also highlight this point. The purchase of the asset under scenario 1 is an unrelated transaction.

The fact that they are £10k once better off from a CGT saving with a pre-planned series of transactions by "second-hand" movement through the company instead of direct purchase is just proof that the whole scheme is solely to avoid tax.

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Replying to stepurhan:
By Ruddles
26th Jun 2024 08:45

"I was stopping my calculations before the asset purchase, focussing solely on how much they are realising directly from the company liquidation"

With respect, that was a bit foolish - in order to compare the end position you need to follow each scenario through to its conclusion.

But I don't disagree with you that the whole thing is a sham and unlikely to meet the stated objective (assuming of course that HMRC would bother to look at it - but as a professional adviser I certainly wouldn't be recommending it as a sensible course of action).

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Replying to Ruddles:
Stepurhan
By stepurhan
01st Jul 2024 09:59

Ruddles wrote:

With respect, that was a bit foolish - in order to compare the end position you need to follow each scenario through to its conclusion.

But I don't disagree with you that the whole thing is a sham and unlikely to meet the stated objective (assuming of course that HMRC would bother to look at it - but as a professional adviser I certainly wouldn't be recommending it as a sensible course of action).

Fair enough.

I just felt that stopping at that point highlights that there was no commercial reason for changing the transaction. Whilst the final value is important for comparing the scenarios, there is no point if you can't get past that first hurdle.

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Replying to stepurhan:
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By Tax Dragon
25th Jun 2024 13:18

No, under the original scenario the individual has £350k of assets. I may not be considering the issues, but I can do the maths.

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Replying to Tax Dragon:
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By Tax Dragon
25th Jun 2024 13:20

Seems I may be able to do the maths, but not as quickly as Ruddles.

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By whopkinscom
01st Jul 2024 09:12

They sound rich enough to pay their dues!

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By ianthetaxman
01st Jul 2024 10:10

I do wonder what the asset is, and notice that the OP still hasn't given this detail, but would agree with others that a high end car would fit the bill.

Seems to me that the 'plan' is to get the company to buy something new and distribute as second hand and therefore worth less.

I suspect there is no flaw as such in the plan per se, as the backside could fall out of the after-sales market for the asset in question, and they make a loss personally on a future sale.

I agree with comments about what the IP might say or do, but surely this will depend at what stage proceedings are at, and how long it might take to recognise the perceived reduction in value. On the latter, the concept of expensive cars appreciating in value due to demand isn't a secret, so it would be interesting to see the arguments that justify the devaluation, only to be sold on days later at a profit?

Also, while the OP doesn't say so, I am assuming the shareholder is a director. I'm sure there's some pesky legislation that requires directors to act in the best interest of the company, and I bet the shareholder doesn't want to resign as a director just yet.

Would I recommend this to clients - I doubt it, as most just want access to the cash and also want some certainty.

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