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Sale of shares for loan stock

Sale of shares for loan stock

A client has been approached to sell 20% of the shares in his trading company, which he has held for more than 2 years, for a mixture of cash and 2.5% index-linked loan stock, redeemable after 5 years, issued by a private company. By way of background, that company, which is his major customer, wants him to continue running the business for the next few years, but with the option to buy the remaining 80% eventually.

The client will have to pay CGT on 25% of the gain realised in cash. With regard to the loan stock, I believe that if it is a Qualifying Corporate Bond, the gain is calculated at the time of sale of the shares, but CGT is not payable until my client cashes in the loan stock. Am I right?

Is this 2.5% index-linked loan stock issued by a private company to my client (and no-one else as far as I know), for which there is no secondary market, likely to qualify as a QCB?

Does it affect the position if my client has the right to redeem some of the loan stock each year (which would reduce his CGT compared with redeeming it in full in year 5)?
Euan MacLennan


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13th Sep 2006 17:31

I'm glad you asked ....
as I was debating a similar point with a colleague the other day as we had an exchange purely for loan notes and I opined that we still needed clearance under s138 TCGA whereas he thought that s116 applied automatically. My take is that if another company issues its shares or debentures this is not a reorganisation of share capital under s127, and therefore has to comply with the alternative conditions in s135, the first of which is that company B must acquire 25% of company A, so I don't think your client qualifies on that ground or under Cases 2 and 3 either. Thus if he up's the stake exchanged to 25% he should be OK. I don't see that the option makes any odds until it's exercised. If section 135 applies, this brings into play the reorganisation provisions in sections 127 to 131 and if s127 applies that would also mean that the special treatment of QCBs in s116 applies. At any rate I have applied for clearance under s138 for an exchange purely for loan notes and HMRC didn't say that no clearance was in point so I reckon I'm right about that. I appreciate this is slightly off-subject but I hope is useful.

I don't see why the loan notes wouldn't be QCBs as you have to go to some lengths to create non-QCBs by building in conversion rights or foreign currency clauses. Seems like a 'normal commercial loan'(s117 refers) so looks like a QCB to me.

I may be wrong but I don't think HMRC are giving clearance for loan notes repayable within 12 months - it used to be six - but otherwise I don't see why redemption may not be staggered.

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