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Selling shares to your holdco

Transfer of shares held personally

Mr X bought shares in Y Ltd with a cost of say £100k. If he sells those shares for £100k to Z Ltd (Mr X is sole director/shareholder), then X would have made no gain/loss, Z Ltd would have carried the same investment cost over.

Am I missing anything? Might there any unintended consequences down the line? If so, a point to some guidance would be appreciated. 

Thanks. 

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15th Oct 2018 20:03

Yes. You might want to look at the Transactions in Securities rules in ITA 2007 Part 13. This is probably caught by this.

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By Ruddles
to Adam12345
15th Oct 2018 21:34

?

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to Ruddles
16th Oct 2018 07:12

Mr X loans money to hold co to buy shares off him for £100k.

Old co pays dividend to Hold Co - tax free for £100k. Hold co repays loan to Mr X with dividend cash.

Mr X has extracted £100k from old co and not paid income tax (paid CGT). Therefore, TiS rules need to be considered, and in all likelihood apply unless Mr X can show the main reason for the transaction wasn’t to avoid income tax - unlikely as can achieve exactly the same result with share for share exchange.

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By Ruddles
to Adam12345
16th Oct 2018 09:15

Adam12345 wrote:

Mr X loans money to hold co to buy shares off him for £100k.

Old co pays dividend to Hold Co - tax free for £100k. Hold co repays loan to Mr X with dividend cash.

Mr X has extracted £100k from old co and not paid income tax (paid CGT).


You managed to glean all that from the information in the question? Well done.
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to Adam12345
16th Oct 2018 08:27

Agreed, IRC v Cleary is in point. Also consider connected persons legislation

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to chicken farmer
16th Oct 2018 08:56

Thanks. Having read a bit on Cleary, I think that this from a Taxation article is probably more relevant to my circumstances:

“However, due to s 689(3)(a)(ii), we understand that HMRC consider that a transaction may also be caught where the purchaser company has no distributable profits, or profits less than the consideration paid, such as where the transaction is funded by debt introduced into the company.This debt must be repaid out of the assets of the company and so may constitute 'assets which would have been available for distribution by way of dividend, apart from anything done by the company'. HMRC's view on this, however, has not yet been tested by case law.”

Read further, the (potential) dividends could be classed as future receipts and therefore future distributable reserves, which sort of touches on Cleary.

I think I’m going nowhere this, unless my client wants to be the one to test it in court - I suspect that he won’t want the publicity though. Unless anyone has any suggestions ...

Thanks all

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By Ruddles
15th Oct 2018 21:42

What is he hoping to achieve?

You may well be missing something, which would be in keeping with the information missing from your question.

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15th Oct 2018 22:47

What you are not telling us is what the value of the shares was when Mr X sold them to his company.

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16th Oct 2018 01:03

Wouldn't he be better to sell them for £100k plus his CGT allowance? Still no tax but higher base cost for company?

Or transfer half the shares to Mrs X and then they sell the shares for £100k plus 2x CGT allowances?

Only joking/

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16th Oct 2018 07:42

Sorry guys ...

I’m (he’s) trying to avoid s455. This isn’t an income tax thing, he’s more interested in capital growth for a sale in 5-10 yrs. admittedly there may be some dividends, but say £10k-£20k pa, hardly raping the company’s reserves (est profit £300k pa). X is not a Director of Y (tradeco).

X’s £100k purchase of Y was on a payment plan eg £25k upfront + 15 months @ £5k. X is using the profit from within Y to meet these payments. Say we’re half-ish way through these terms, so the YE loan account in Y is £60k.
My (possibly naive) thoughts were if X flips the shares onto Z (holdco), loans Z £100k (or, say, £60k +£5k pcm) to buy the shares from him, then that in turn could be used to repay his loan from Z and fund his future purchase payments.

The cash would come from his personal capital, which he’d prefer not to use until I tell him it’ll save £k’s in s455.

In terms of MV for shares, given there was a SPA for £100k within the last year, I presume that we can take that as a solid indication of MV?

Thanks

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16th Oct 2018 08:28

Slightly off topic, but if you come across any other businesses earning £300k profit that are available for £25k down, do please let us know...

Thanks in advance

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to WhichTyler
16th Oct 2018 09:02

Nowhere does it say he owns Y outright. For all we know the £100K in shares represents 1% of Y's equity.

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to Duggimon
16th Oct 2018 09:55

OK it's not explicit but 'X’s £100k purchase of Y' and the comment about taking dividends lead me there. Also I would have thought it's unusual for the vendor to allow the purchaser time to pay and the company to run a loan account for a minority shareholder.

I admit its circumstantial though...

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