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Share exchange clearance needed ?

A client is questioning "why" we have to wait for clearance as they want to move quicker.

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My client is questioning why we need to wait for HMRC share exchange clearance as they want to act quicker as part of their plan to move their business forward.

The facts – my client owns 90% of a trading company (let’s call it Selling Widgets Ltd) and her ex-husband the other 10%. It was 50/50 but when they split up and the company bought and purchased from Mr X most of his shares for £100k – he retained 10% of the company so that if/when it is sold in years to come he will benefit – this was all agreed with the lawyers and happened last year.

My client is now looking to grow the company/create a new group structure and has secured investment from staff members and some outside as part of the new structure that branches out away from the current business of selling widgets. They will diversify into new areas of Consulting Widgets Ltd and Making Widgets Ltd. The plan is that all three companies will be in a group called Widget Holdings Limited which will own the shares of Selling Widgets Ltd (90% as ex husband will own 10%), and then Consulting and Making will be set up as new subsidiaries.

The staff/external investors have agreed to purchase some 20% of Widget Holdings Limited (when it is all set up) and will pay some £100k for these shares, and my client will Own the other 80%

Part of the reason for this is so that ex husband will still benefit from his 10% of Selling Widgets Limited but they don’t want him to benefit from anything new that he hasn’t been involved in – ie the new businesses Making and Consulting. The old business will not be affected detrimentally so this is not detracting from the value of the ex-husbands holding it is just excluding him from new ventures.

They have agreed all this “in their heads” and then came to me to advise / help (I wish they had notified me sooner rather than at the last minute but nothing new there….)

The issue is the transfer of ownership of the 90% of Selling Widgets Limited to Widget Holdings Limited. And this is where I am seeking advice from members.

My client has said she wants to just “give” her shares in Selling Widgets to Widget Holdings and sees no reason why she can’t just do a share transfer for £nil. As she owns all of Widget Holdings Ltd. “It is my company why do I have to wait for HMRC” (etc

I have advised that we need to seek clearance from HMRC that the transaction won’t attract a tax liability but they just want it all done before 31st March.

I have advised that a share for exchange is needed (and the costs involved – I use a local law firm to do this type of thing so all is done correctly) but it may not work correctly as Shares in Oldco are not all being exchanged as ex husband still owns some.

I want to help but don’t want to give the wrong advice or upset my client so my questions are;

  • Do we have to do a share for share exchange? Can we just do it? Ie she sells her 90% holding in Oldco to New parent so for £nil
  • If we do that is it likely that HMRC would challenge in the future and say the sale was at undervalue
  • Should the sale be at Market value – lets say £200k and we defer the gain via a holdover claim?
  • Stamp duty issues and the reporting of any disposals

Apologies if I am “putting” on members for thoughts – I am not seeking free advice on actually doing all I am merely using you all as a brainstorm for ideas/things I have missed/should consider/different options (in the way I used to when in my old practice and you just sat with everyone and kicked the ideas around – I do miss those days sometimes!!)

Replies

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23rd Mar 2019 15:35

What she should not do is “sell” her shares for nil.

A share-for-share exchange should work - it doesn’t matter that ex-husband will continue to hold some shares. The holding company needs to hold only 25% of the target (although there would be no Stamp Duty relief).

Clearance isn’t essential (and in this case I’d be extremely surprised if it weren’t given). However, if the client insists on proceeding without it she needs to be fully aware of the consequences of HMRC refusing paper-for-paper treatment.

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to Wilson Philips
23rd Mar 2019 15:46

Wilson Philips wrote:

What she should not do is “sell” her shares for nil.

Why?

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to Tax Dragon
23rd Mar 2019 16:18

To be perfectly honest, I don’t know and chipped in without really thinking. In theory the shares could be gifted to the new company and holdover claimed. But it does beg the question why everyone doesn’t do it instead of incurring the delay and expense of a share-for-share exchange/clearance.

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to Wilson Philips
23rd Mar 2019 18:13

One potential issue does spring to mind, but only if there’s the possibility of a sale in the near future.

Entrepreneurs’ Relief could be lost.

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to Wilson Philips
23rd Mar 2019 20:27

Talking of which, maybe hubby should have sold up completely while he qualified (assumptions alert).

But if the growth is being channelled elsewhere, why's he bothering keeping the shares?

Here's a thought - forget the complexity of the group structure: just buy him out now.

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to Tax Dragon
24th Mar 2019 08:40

Tax Dragon wrote:

Talking of which, maybe hubby should have sold up completely while he qualified (assumptions alert).

But if the growth is being channelled elsewhere, why's he bothering keeping the shares?

Here's a thought - forget the complexity of the group structure: just buy him out now.


Hubby didn't sell all of his holding as there is potential that this business could be worth a significant amount in future (if their plan comes off!) and they separated amicably and she wanted to ensure ex-hubby benefitted in years to come (I did advise the lawyers at the time that maybe she should have retained all shares and then when she sells in years to come and pays 10% tax give him cash then as it would be worth more but I think she knew when they divorced that her plan was to have other businesses - who knows!)
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to Wilson Philips
24th Mar 2019 08:37

Wilson Philips wrote:

One potential issue does spring to mind, but only if there’s the possibility of a sale in the near future.

Entrepreneurs’ Relief could be lost.


There is no plan to sell in the next 3-4 years at least - there is a longer term plan to sell when they get to certain size - if they get there sooner then so be it!
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to Wilson Philips
24th Mar 2019 08:49

I absolutely agree - I have stressed that they should wait but they want to launch on 1st April (they have even done the branding!)

I might be able to get them to wait and do it "properly" if I advise of the risks and costs

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24th Mar 2019 09:13

Thanks for the responses so far - I had considered the gift of her 90% to new holding co and claiming holdover as that could be done before the 31st of March - But I don't believe she can claim holdover relief as she would be gifting shares in her personal company to another company - or am I wrong ? I am seeing her on Monday afternoon and so might raise that whilst explaining the risks/costs/timings of all options. That may actually be the quickest and easiest option anyway - or am I missing something ?

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to John Webb
24th Mar 2019 10:08

Provided that the conditions of section 165 of TCGA 1992 are met a holdover should be available.

One issue is that in addition to the transferor having little or no base cost in the parent company’s shares (which would be the case in any event with an exchange), the parent will have no base cost in the target company shares (whereas it would have a market value base cost on an exchange). That might not be a problem so long as SSE is available on a future sale of the target, but...

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to Wilson Philips
24th Mar 2019 10:17

Thanks for the note - maybe I had misunderstood the details but I had read (see here https://library.croneri.co.uk/cch_uk/tpo/i-40-180 ) that clearly states that ".......... except that no holdover relief is available on the disposal of shares or securities to a company." maybe it is different if it is to your own company but that's what I understood

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to John Webb
24th Mar 2019 10:56

Yes - it was there in front of me all along - section 165(3)(ba).

Like I said, yesterday (and today) have not been my finest, but it does seem that I was right all along, and have found the answer to why people do not gift shares instead of exchanging!

So I revert to my initial answer.

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By Matrix
24th Mar 2019 09:28

Do they have to be in a group? Is there the likelihood of losses? Would it be too complicated for the new investors to own 20% of the holdco and 90%x20% of the existing co separately? I don't see why this should hold up the new business starting on 1 April in any case, you could transfer the existing shares once the clearance is obtained.

I don't really get the numbers if their 20%x90% =£100k then why is her 90% only worth £200k? Are you attributing some value to the non existent shares already or is this due to the goodwill/brand, in which case wouldn't some of this be also attributed to the ex's 10%

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to Matrix
24th Mar 2019 10:24

Thanks for the reply - they don't have to be but that is what they want as they plan to have all the key employees TUPE across to newco (yes they had already consulted their employment lawyer on that! but didn't discuss the rest with me until now!) and new holding co will employee the key employees and there will be management charges etc - I don't think I will be able to change their minds there.

With regard the holding up trade you are probably right - they could just start and transfer shares after - HMRC should be OK?

With regard the numbers the company is worth £200k based on what was agreed at the time of divorce and it hasn't really changed much since so that is just a simple valuation - the external investors and employees are paying in at a premium and they seem to be happy with that - the employees are paying less than the external investors - I think that my client has managed to convince the external investors of the long term potential - or was just good at upselling (she should have gone on Dragons Den !)

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By Matrix
to John Webb
24th Mar 2019 11:06

What are the accounting entries for the £100k or is this paid to her for the 20% in which case wouldn't she have a gain at that point anyway?

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24th Mar 2019 14:32

use the co act to compulsory acquire the minority now ?
clean up share reg
may not need new hold co - and no loss of ER or stamp duty implications on a new hold co....
seem to have a co valuation so a desktop for a circa 10% discounted etc should notbe too difficult to assess

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