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Sale of shares and Entrepreneurs relief

Sale of shares and Entrepreneurs relief

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My client, an individual, is a shareholder in a company(alpha). The other shareholder is a company which is a subsidiary of a multi international company, I will call this the parent company, Beta.

The company is currently trading and has been trading for a long time. 

The shareholding are: 45 B shares for my client, Trevor, the other shareholder, company Beta, has 55 A shares. Both A and B shares have the same rights, voting etc.

My client wants to retire  and sell the shares to the other shareholder, company Beta ( he had the shares for a long time and has been a diretor, for over 10 years).

When the sale is complete, the company(Alpha) will cease trading and close. The parent company(Beta) does not wish to keep the company without Trevor,so will stop trading and close imediately after they purchase the shares from Trevor. Beta will employ someone directly to do the job, selling the products in the UK rather than operationg via this company Alpha.  Alpha company was set up to sell the products of the parent company, Beta. The structure was as above with the shareholdings 45 for Trevor and 55 for parent company Beta.

On the face of it, it appers that when Trevor sells the shares to the corporate shareholder, Beta, the consideration will qualify as capital gain and ER can be claimed.

Client does not wish to go through MVL.

Are there any implications if the company will then cease to trade?

Is the company a personal company even if the other shareholder is a corporate shareholder, a company listed on the stock exchange?

Any other points to consider?

Thank you very much for any advice.

 

 

Replies (17)

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By Tax Dragon
30th Jul 2019 13:58

How does the amount being paid for the shares compare with the market value of those shares?

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Replying to Tax Dragon:
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By nic1995
30th Jul 2019 15:01

The valuation will be based on the Net assets.

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Replying to nic1995:
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By Tax Dragon
30th Jul 2019 15:09

45% of the Net Assets?

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Replying to Tax Dragon:
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By nic1995
30th Jul 2019 15:21

yes.
They cant use a market valuation since the intention is for the company to close after the sale of shares.
The main reason for doing this is so Trevor can receive his share of retained earnings as a capital gain. The other assets are minimal.
Maybe MVL is safer? Does it matter if the company will close after he sells his shares?

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Replying to nic1995:
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By Tax Dragon
30th Jul 2019 15:28

If retained earnings have been "artificially" inflated by a reduction in dividends, then TiS is a potential issue. Pretty remote though.

My MV point was about ERS, but it sounds like that's an irrelevance. As is what happens to the company following the transaction (finally to get round to your question! :))

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Psycho
By Wilson Philips
30th Jul 2019 14:03

I don't see any pitfalls. In theory, HMRC could try and apply either the TAAR or GAAR but provided your client can demonstrate - as clearly seems to be the case here - that there is no tax avoidance motive, all should be fine. The listed status of the other shareholder is of no relevance.

Edited - subject to the market value point referred to above

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Replying to Wilson Philips:
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By nic1995
30th Jul 2019 15:13

Thank you for your reply.
There is no motive for tax avoidance, but the arrangement could be seen as to minimise the tax, capital route rather than just closing the company and distribute the funds as dividends.

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Lisa Thomas
By Insolvency Practitioner
30th Jul 2019 14:35

Out of interest why has the client discounted an MVL - due to TAAR or something else?

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Replying to Insolvency Practitioner:
Psycho
By Wilson Philips
30th Jul 2019 14:41

I suspect that it's because a straightforward sale of shares from one party to another, who are known to each other, would undoubtedly be the cheaper option.

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Replying to Wilson Philips:
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By Tax Dragon
30th Jul 2019 14:52

And (this is a guess) because there isn't much in the company to take out; it's not unreasonable for a supplier to be happy for there to be an element of "thank you" in the settlement - you just need to take some care with the tax in that case.

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Replying to Tax Dragon:
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By nic1995
30th Jul 2019 15:29

approx. £400k of retained earnings, no other assets just some office equipment, and hardly any creditors.
For the corporate shareholder it makes no difference whether the distribution is capital or income, so they are happy to buy Trevor out first before they close the company.

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Replying to nic1995:
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By Tax Dragon
30th Jul 2019 15:35

Is "retained earnings" your way of saying "cash"?

HMRC could challenge ER. I doubt they'd challenge capital treatment.

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Replying to Tax Dragon:
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By nic1995
30th Jul 2019 16:36

I meant the accumulated profits, and yes the other side is cash.
Why do you think ER will be challenged? because of the cash? but surely this was accumulated as a result of profits not paid out. There are no investments just a saving account .

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Replying to nic1995:
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By Tax Dragon
31st Jul 2019 06:47

I don't think ER will be challenged. Subject to what you haven't told us, I don't think any of this will be challenged. But you posted looking for issues; I have been trying to oblige.

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Replying to Wilson Philips:
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By nic1995
30th Jul 2019 15:14

yes that is the main reason.

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Replying to Insolvency Practitioner:
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By nic1995
30th Jul 2019 15:02

MVL is more costly.

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By nic1995
30th Jul 2019 16:06

Thank you for your replies.
I don't believe TAAR will apply even with the MVL option, as the main reason is for Trevor to get out and retire, go travelling as he said. He will not be involved in any way with any trade.
As for the GAAR, this is designed to target abusive arrangements. Not sure if this arrangement is abusive.
Admittingly, it could be seen as planning to minimise the tax liability.
To the comment by Tax Dragon, in respect of retained earnings being potentially inflated by reduction in dividend;
Dividends are normally paid in June ( year end is March), the intention is to get this arrangement done in May 2020 before June 2020. On these basis TiS may to apply.

My concern is that the other shareholder is only purchasing Trevor's shares to help him with the capital route as it makes no difference to them. Otherwise, they will just close the company and distribute the funds as income. Perhaps it is still safer to go for MVL.

Thank you

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