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Settlements legislation for capital gains tax

Is there an equivalent to s621 ITTOIA 2005 for CGT

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A father made a settlement 4 years ago. Bare trustee was a an unconnected solicitor, and beneficaries were 5 minor children. Trust property was shares in a property development company.

Family now wishes to make eldest child, who just turned 18, the sole shareholder and director.

It is estimated (reasonably IMO) that the fair value of 100% of the company is now £300k. It holds around £2.1M FMV of investment property, owes £1.8M to the father and members of his family, currently interest free and repayable upon demand,  and gross rental income is now a little under £100k annually.

My tentative cunning plan is to convert the 4 other children's ordinary shareholdings into a £12,3000 cash payment this year  + £47,700 each interest bearing redeemable shares to be paid out over a number of years (which should be Qualifiying Coroprate Bonds  for the purposes of holding over the gain over until redemption per S116 TCGA 92). £12,3000 corresponds to each minor child's annual exempt amount, and £47,700 is £60,000 - £12,300. The genuine commercial reason (as well as the tax advantage) of fragmenting the transaction is that the business is only generating £100k pre tax and overheads per year so cannot afford to buy out the 4 children in one year. I understand there is a risk that HMRC would argue that nevertheless the scheme is one where *one of the main purposes* is the avoidance of tax (s207 FA 2013) but I think they might struggle to establish that it was "abusive".

As the trust is a bare trust it is tax transparent for capital gains so there should be 4 sets of tax free annual exemptions, and so I am hoping that the whole transaction can proceed with only (£47,700 - £12,300) x 4 x 10% = £14,160 capital gains tax charge (and the tax on the interest earned on the redeemable shares would have to be assessed on the father under S621 ITTOIA 2005). The interest would be tax deductible within the company.

Am I missing something important?

Replies (12)

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By The Dullard
30th Jun 2021 13:26

Assuming the £47,700 of redeemable shares (x4) have a value of £47,700 (x4). Then dad has dividend income of £240,000 (well, to the extent that the £240K exceeds the amount originally subscribed for the shares) when you implement your plan, I reckon.

I don't think that the interest on the redeemable shares is deductible in the company though, because it is a return on shares.

I think you've got the CGT position right for the kids, apart from the QCB bit, which again does not apply to share capital.

These last two points (but not the first) can be resolved by replacing the redeemable shares with loan stock, obviously, for which you will need the help of a commercial lawyer.

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Replying to The Dullard:
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By TASG
30th Jun 2021 14:38

Interesting.

I was hoping CTA210 S1033 would be applicable to the redemption of the redeemable shares and would be a capital rather than income distribution. For accounting purposes, they would be treated as debt instruments, and would carry a commercial rate of interest (3%?) , with a defined redemption date, and, I'm thinking, no voting rights.

Definitely going get a learned friend to draft the paperwork (resolutions to amend the articles of association, and contract to exchange ordinary shares for redeemable shares).

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Replying to TASG:
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By The Dullard
30th Jun 2021 15:01

TASG wrote:

I was hoping CTA210 S1033 would be applicable...

There are two transactions: (1) the purchase of the existing shares for for a consideration comprising £12,300 in cash and £47,700 in redeemable shares (or loan notes) and (2) the redemption of the shares (or loan notes).

On the face of it, s 1033 will not apply to the first transaction because: (1) the company does not appear to be a trading company, (2) HMRC do not accept that a valid purchase of own shares can be done otherwise than for a consideration wholly in cash, (3) there doesn't seem to be any benefit to any trade, and (4) it fails s 1042 because the remaining shareholder is an associate of the 4 outgoing shareholders with a disqualifying interest.

I don't think you need s 1033 to apply on the subsequent redemptions, because either the proceeds won't exceed the consideration given for the shares or (being loan notes) they will be exempt QCBs.

TASG wrote:

For accounting purposes, they would be treated as debt instruments...

For tax purposes shares are shares and aren't loan relationships, because there's no money debt arising from a transaction of the lending of money.

What you really want is for there to always have been a discretionary trust, rather than a bare trust, or for dad to have just decided what his wishes were from the off.

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Replying to TASG:
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By TASG
30th Jun 2021 15:18

Edit: you are definitely right that if it is called shares it is taxed as dividends. Loan stock it is - thanks for the tip.

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By The Dullard
30th Jun 2021 15:02

Fuching stupid spam filter!

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By TASG
30th Jun 2021 15:18

I am actually glad it's not a discretionary trust because then I would have to learn what an exit charge is.

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By Tax Dragon
30th Jun 2021 15:31

I agree with Dulls. (Edit 1: Though possibly, in part, for different reasons.) Eg C in s1000(1) somehow seems relevant at stage 1 of your cunning plan.

But to consider your headline question: Is there an equivalent to s621 ITTOIA 2005 for CGT? That can't be quite what you mean. All s621 does is charge tax on income, capital sums and benefits. That's needed because there isn't a rule that says all income is taxable. Income isn't taxable unless it's charged to tax. TCGA works the other way round - all gains are chargeable unless exempt (s15(2)) and all chargeable gains are taxable (s1(1)).

I think what you may have meant is whether s77 TCGA exists. No, it's been abolished.

But that's irrelevant, because CGT is not in point. And (edit 2) loan stock doesn't avoid the income tax charge.

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Replying to Tax Dragon:
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By TASG
30th Jun 2021 16:43

Thanks for the steer to S77 TCGA and the repeal.

Why is CGT not in point? 4 minor siblings are effectively disposing of their shares.

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Replying to TASG:
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By Tax Dragon
30th Jun 2021 17:06

I misspoke. CGT is in point.

However, I would expect there to be no gains, as the proceeds (in excess of subscription) are taxable as income. That said, as the income tax charge is on dad, maybe you're right that the proceeds are not reduced for the children. (Sounds unlikely to me, but... you tell me. It doesn't seem to be covered by s37. So maybe the revocation of s77 doesn't help you after all.)

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Replying to Tax Dragon:
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By The Dullard
30th Jun 2021 17:34

My reading of s 37 was that the kids will have gains as well as there being dividends from dad.

The elder brother is essentially using the companies money to buy out the younger siblings. He could extract that as dividends to prevent them being taxable on dad. :)

Which is why it should have been a discretionary trust, of course.

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Replying to The Dullard:
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By Tax Dragon
30th Jun 2021 17:53

Yeah, by "it doesn't seem to be covered by s37" I meant that s37 doesn't seem to stop the proceeds being liable to CGT as well as income tax - i.e. the same as you mean.

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By TASG
01st Jul 2021 10:11

So we need to focus in on S1033+ CTA 2010 (capital treatment for buy back of own shares).

a) Trading company - on balance I would say increasingly not. It did develop this land, but the strategy now seems to be to hold for investment.
b) UK residency condition (S1034) - met.
c) Period of ownership: 5 years: will be met shortly (S1036)
d) Seller's interest substantially reduced: no met due to associates

Very much a spoke in the wheels.

So seems it would be better if the older brother just contracted to buy the shares from the trustee for his siblings and paid them out over the next few years from his dividends. So £47,700 x 4 x 10% CGT = £19,080 CGT (+ 0.5% stamp duty = £1,200)?

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