Sale of shares in family business - QCB's

Sale of shares in family business - QCB's

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I've been asked to give some general advice to a friend who is disposing of his shares in a family company. He owns half the company, the remaining 50% is owned by his brother. The brother does not have sufficient resources to buy the shares, and so they are considering having the company buy back my friend's shares.

If there is a share buy back then I think the capital route will apply (although we will go for clearance on this). Assuming the capital route does apply, and part of the consideration is QCB's, can the part of the gain relating to the QCB's be deferred in the normal way. Or are there special rules since it's a share buy back?
Carlo Dinardo

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By carlo.dinardo
02nd Feb 2007 14:25

Instalments
Thanks Mary.

Paying the consideration in instalments is a good idea. I assume then that the present value of the instalments was the deemed proceeds in the capital gains calc?

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By wdr
02nd Feb 2007 10:45

Sorry, but a company buy back will not qualify for capital treat
For ICTA s219 to apply, the conditions of ICTA s221 must be satisfied.
If it is a 50;50 company, and his brother is the remaining 50% shareholder, then as they are associated no 'reduction' will take place.

The solution might be for a new Holdco to make an offer to acquire the shares either for shares in Holdco[brother] or QCB's issued by Holdco[vendor]. You will need a robust story to accompany the ICTA s707 and TCGA s138 clearances.

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By User deleted
01st Feb 2007 18:28

Why not try paying by instalments
We have successfully obtained clearance from HMRC for the capital route to apply to a POS where the consideration for the shares was paid by instalments.

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By Taxcon
01st Feb 2007 11:45

Thanks Brian
If you read the case itself as opposed to a summary you'll see that Park J explicitly referred to this point and said he did not think (for a variety of reasons) that 'payment' in the CA was limited to payment in money. Bramwell also refers to this case as authority for that view.

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By Brian Gooch
31st Jan 2007 16:57

Cash
The summary of BDG Roof-Bond v Douglas that I found didn't refer to payment of assets in specie at all, the case seems to be primarily concerned with distributable reserves and qualified accounts.

I believe that the requirement for the purchase to be made in cash is a Companies Act one - it must be in cash on completion, although HMRC do accept that a loan back of some funds where the company can't afford to pay it all up front can be acceptable (an old Tax Bulletin referred to this).

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By Taxcon
31st Jan 2007 15:08

POS
Both comments below are sensible, but it's worth pointing out that following BDG Roof-Bond v Douglas (the case is a cautionary tale and well worth a read) it appears that a POS can be made by payment in specie as well as cash; the Revenue has yet to catch up with this development in the law! Whether a QCB would qualify under that head is highly debatable, though, in my view. One might also have to make specific reference to s.138 TCGA 1992 in any clearance application, I'd have thought.

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By peter.blatch
30th Jan 2007 12:11

The QCB s are treated in the normal way but...
You will need to be very careful to ensure that the vendor is not connected with the company after the sale. Section 228 TA 1988 can often cause a problem in these circumstances.

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By Taxcon
02nd Feb 2007 20:19

Carlo
Instalment arrangements in a POS have to be structured very carefully or they will infringe company law and/or not be acceptable to the Revenue - straightforward deferred consideration will not generally do. You need to tread carefully. It's a big subject - email me on [email protected] if you need to know more.

Simpleson - I don't think that siblings are associates for this purpose - see s.227.

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